Essay by PaperNerd ContributorUniversity, Master's November 2001

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THE UK'S OPT OUT FROM THE EURO The UK has opted out of the first wave of Euro countries and there must be a referendum before the UK decides to enter the new currency system.

Despite the UK's non-participation inside the eleven-country grouping, there are important economic implications of the new Euro-Zone for UK companies and households. These will be increasingly apparent as the Euro establishes itself within the financial and business communities.

Continued foreign exchange transactions costs and exchange rate risk if sterling is volatile against the Euro Euro money market and foreign exchange business may switch towards Paris and Frankfurt and away from London British business must adapt to the Euro (in or out) . Many European companies will ask UK firms to invoice them in Euros (the so called "Euro-Supply-Chain effect") Pricing strategies may have to change (transparency of prices in Euros may lead to less price discrimination) Nominal and real interest rates may remain higher in UK if Euro is strong and EMU is a success in keeping inflation down.

This will impact on The UK may become less attractive for foreign investment "" although it retains many structural "supply-side" advantages over other EU nations Will the UK be able to run an independent monetary policy if it remains outside of the Euro Zone? So far the Monetary Policy Committee has cut interest rates in 1999 in response to a domestic economic slowdown and falling UK inflation. In future years, possible entry to the Euro Zone may come to influence their decisions on interest rates.

ARGUMENTS FOR UK MEMBERSHIP OF EMU Reduced exchange rate uncertainty for UK businesses and lower exchange rate transactions costs for both businesses and tourists will bring an increase in economic welfare The UK will benefit from an increase in intra-European trade...