1. BRITAIN SHOULD JOIN THE EURO Firms relying on exports won’t have exchange rate instability – promotes investments & competitiveness Reduced transaction costs – commission & currency spread from exchanging £ Increased intra-EU competition – price discrimination more difficult – a more fluid market Increased inward direct investment – multinationals may like eurozone investment

2. BRITAIN SHOULD NOT JOIN THE EURO Stability & Growth Pact reduces gov’t ability to offset economic shocks with fiscal policy (deficit no greater than 3%) MPC has performed well with “inflation band” – ECB target is “below 2%” which may be deflationary ECB sets interest rates for the average monetary conditions in the eurozone – UK may not be average at the time – may be wrong policy for the UK Asymmetric policy sensitivity – UK households usually hold “variable rate” loans –more sensitive to interest rate changes than euro counterparts

3. OTHER ISSUES TO CONSIDER Nationhood? Sovereignty? Federal European Power? Unites States of Europe? Conflict?

4. FIVE ECONOMIC TESTS (FROM GORDON BROWN’S ERA…) Cyclical Convergence Flexibility Inward Investment The Financial Sector Overall Benefit

5. CYCLICAL CONVERGENCE Are the business cycles and economic structures of the UK and the Eurozone compatible so that the UK can adopt ECB interest rates with no ill effects? An ECB expansionary policy at a time of overheating in the UK economy would be There has been some convergence (narrowing between inflation rates, interest rates, output gaps, etc) but not enough

6. FLEXIBILITY Is the UK economy, and specifically its labour market, sufficiently flexible to deal with economic circumstances as they arise? Reallocation of resources throughout the Eurozone requires mobility of labour to ease the adjustment Some improvements in labour flexibility have occurred in the UK but not enough, and more also required in the Eurozone countries

7. THE FINANCIAL SECTOR It was generally thought that staying out of the Euro would move stock market activity out of London – this has not substantially happened If joining meant decreased interest rates, it might actually increase prosperity of the City Fund managers could diversify portfolios in European shares But, decreased interest rates my adversely affect pensions This test got the green light from Brown

8. INWARD INVESTMENT & OVERALL BENEFIT These is directly related to flexibility & convergence Joining the EU would attract investment but a poor position on flexibility & convergence would repel FDI If other tests were passed, overall benefit would follow!