What happens if we join the Euro

applesrace

Hi all,

Apologies if this is a stupid question ....

I've been looking at long term fixed mortgage products. With the current BR of interest in the UK at 4.5%, long term fixes are available at approx 5%.

The rate in the Euro zone is 2.75%. What would happen if we joined the Euro? Would our rate match the Euro rate instantly or would we have a period of re-alignment? Either way would it mean that my long term fix was costing me a lot more money than it need be?

Thanks a lot,

Apple

Joe_Bloggs

This is speculation on my part. Were you on a BofE tracker then the BofE rate would vanish and some other Central European Bank rate would be used. Some tracker rates are collared, that is they have a minimum to which they will follow the current central bank rate down.
If the initial rate was fixed then I can't see the rate changing. Once again is just a speculation on my part.
J_B.

jonteague

We would have to be aligned before we would join. This is number 1 of Gordons magic 5 (make them up as you go along and interpret them whatever way he wants) "economic tests".

In practice to get alignment the £ will have to drop against the Euro (i.e. less Euro for your money when you go abroad) though this might happen steadily without the exchange rate re-alignment as the UK economy is growing faster than the Euro zone anyway.

Jon.

TangentMan

Before Euroland switched to the Euro there was a period of alignment which included base rates etc. There was also a period of currency alignment known as triangulation that meant all currency exchanges for Euroland currencies went through the Euro. This was a good few years.

It should also be mentioned that the BofE repo rate is largely a notional rate. By that i mean it isn't as though the lenders borrow money off the BofE. but it is used as a yardstick for economic movement - since the UK is quite a high homeownership economy. The BofE Repo rate is therefore more used in terms of up and down than inherent value.

But, given that the UK is outperforming Euroland and the problems of using a single rate to control diverse economies has been realised, i don't see us heading for the Euro anytime soon. Even a ten year fixed won't be bothered by such a move.

applesrace

So in short. If we joined (or prior to joining) the Euro our interest rate would be brought in line. i.e. made lower. The lenders would then start to offer products based on this rate.

The real debate should be in that case will we join the euro ??

TangentMan

Nothing much in the Euro for the UK at the moment.

Problems with the divergent economies in Euroland make control of our economy a very sensitive issue (we are affected by mortgage rates other countries are not due to more renting etc).