Year 13 Economics

In November 2008, European Union (EU) economics experts predicted that the UK would
suffer the deepest recession of all the EU’s major economies, with a contraction of 1% in
2009 and growth of only 0.4% in 2010. Overall, they also painted a bleak outlook for the EU,
with growth of only 0.2% in 2009. Other forecasts suggest that even this may be optimistic.
Amidst the pessimism, the pound has continued to weaken to a point where it has often
been close to parity with the euro (€1 = £1). In December 2008, 88p was needed to buy
one euro, 30p more than was needed in October 2000. UK tourists in the euro area are
being hit hard, as are UK citizens residing there.

On the other hand, in these difficult times, UK exporters will be seeing the weak pound as
their potential salvation. There is also the hope that UK consumers are more likely to buy
domestic goods than more expensive imports from the EU. Additionally, tourists from the
euro area will bring their spending power into the UK retail sector.
It is not difficult to understand why the pound has fallen against the euro and other
currencies. Speculators are selling pounds as economic forecasts worsen. There is also
concern over the size of the UK fiscal boost and over interest rates approaching zero.
Business confidence is a distant memory as consumers cut their spending.

The weakening of sterling has proved to be a rallying cry for those who support the
adoption of the euro by the UK. They argue that the euro would be a safe haven from the
volatility being faced by the pound. They also argue that the recent fall in the exchange
rate has taken sterling to a competitive rate at which it can be successfully locked into
the euro area. However, they seem to ignore the fact that the euro could also fall apart
under the strain of EU and world recession.

There are, of course, long-standing arguments for the UK’s adoption of the euro. It
would perhaps provide a further stimulus to UK-euro area trade and help to reinforce the
benefi ts of the Single Market, of which the UK has been a member for many years.
Opponents are not slow to point to the loss of economic sovereignty and argue that we
would be foolish to lose the power to set our own interest rates. Recent experience offers
support for this argument. The success of the UK economy in the years up to 2008 will
also reinforce the arguments of the euro’s opponents.
Some might argue that it would be foolish to base a major long-term decision

such as the adoption of the euro on the short-term problems which sterling has faced. On balance, UK adoption of the euro at such an economically unstable time remains highly unlikely, whatever the potential benefits.

Extract D (lines 13-14) argues that it ‘is not difficult to understand why the pound has
fallen against the euro and other currencies’.
Explain what is meant by ‘the pound has fallen against the euro and other currencies’
and analyse two determinants of such a fall. (10 marks)

Extract D (lines 32-33) concludes that ‘UK adoption of the euro at such an economically
unstable time remains highly unlikely, whatever the potential benefits’.
Using the data and your economic knowledge, to what extent do you agree with the view
that the UK economy would benefit if the euro were to be adopted by the UK at some
point in the future? (25 marks)

ESSAY QUESTION FOR HALF-TERM COMPLETION:

‘It is better to do everything you can to prevent deflation before it begins, even if there is only a small
chance of it occurring.’
1. Explain how monetary policy might be used to prevent a period of deflation. (15 marks)

2. Assess the impact on UK macroeconomic performance of a prolonged period of

deflation. (15 marks)