Prior to answering the effects of the entering of UK into the euro zone, we should state that this is not a very easy task (entering the euro zone). It is believed that sterling is overvalued against the euro. The farther the value is from the equilibrium value, the more difficult it would be for the UK to enter euro. However this overvaluation of the English currency seems to have beneficial effects for the UK, because it keeps the inflation in very low levels. A possible entrance in the euro zone would reverse this situation and could raise inflation. This could result in greater fluctuations in interest rates. Also Sterling strength has been more pronounced against the euro. It has been relatively stable against the euro over the last two years.
On the other hand this overvaluation of the Sterling had as a result the fall in the profitability of trade, which also resulted in the raise of unemployment over the last two years. Also this overvaluation is closely related to the current account deficit. This is because over-valuation results in the economy importing cheaper goods and pushing out uncompetitive exports. However this is not the case with the other European countries, which have increased their surplus, through divergent investments in the manufacturing and service sector. This increase in surplus in the service and investment income has helped to reduce the overall deficit.
According to Ajay Jaiswal an analysis of data for different regions with which the UK has trade suggests that euro has not hurt the UK manufacturing sector as much as other factors (like cheaper imports from Asia). This implies that euro is not the most dominant obstacle facing UK manufacturing. Many UK companies are relocating their production bases to Asia as compared to the euro zone.
The service sector and investment income has prospered despite the level of exchange and downturns in the global economy.