Euro

... for all member countries. Of course, the ECB is able to operate Monetary Policy over the whole Euro zone, but an increase or decrease in aggregate demand might have a positive effect on one economy but a negative one on another. Economists argue whether the economies of the Euro zone are suitably synchronized to allow policies such as this to be used universally.

2. Fiscal Policy

Fiscal policy is closely linked to monetary policy and is also used to control aggregate demand. However, it does so by controlling the amount of government spending and taxation. Increasing government spending will increase aggregate demand:

AD = C + G + I + X - M

Increasing taxation means that incomes are lowered, which causes consumer expenditure to go down which means that aggregate demand, goes down (see above). Of course, both can be applied vice versa as well.

Fiscal policy becomes more or less useless with the adoption of the Euro, since one of the convergence criteria for joining the Euro zone is a low government debt. This means that the government cannot increase government spending to increase aggregate demand.

3. Exchange Rate Policy

Exchange Rate Policy is the devaluation and revaluation of a currency in order to deal with a balance of payments deficit. Little needs to be said here, since obviously with membership of the single currency this will be out of the control of the British government and in the hands of the ECB.

This leaves only Supply-Side Policies, which are rather limited in their applications. They involve deregulation to lower costs of production for businesses, and increasing labour productivity to increase growth rate (by promoting competition, privatisation, reducing strikes, etc.)

The main reason behind ...