EUROPEAN MONATERY UNION
EU is consisted of institutions, directories and services that helps the national governments to integrate. There is a political system centered on Brussels, not only the political capital of Belgium but also the locus of EU policymaking. National governments, parliaments, courts, and other bodies participate in the EU system, as do separate EU institutions such as the European Commission and the European Parliament. Further inquiry would reveal that a complex system of EU governance produces rules and regulations covering a host of policy areas ranging from agriculture to antitrust, the environment, immigration, and international development and of course economy. There is considerable variation in the applicability and implementation of EU policy among the member states.
Between 1973 and 2004 the EU grew from six to twenty-five member states. Not all of the new entrants shared the founding member states’ commitment to political integration. Some, like Denmark, Britain, and Sweden, were openly skeptical of political integration and averse to sharing more than the minimum amount of sovereignty necessary to achieve common economic goals. The accession of so many new member states, with so many more interests, perspectives, and preferences, further complicated the process of European integration. It also brought more policy differentiation to the EU, one of the most striking examples being the decisions by Denmark, Britain, and Sweden not to adopt the euro. My topic is about the UK still persistence not to join single currency, euro.
First I want to mention about European Monetary Union (EMU). EMU is the agreement among the participating member states of the European Union to adopt a single hard currency and monetary system. The European Council agreed to name this single European currency the “Euro”. The European states decided that the EMU and a single European market were essential to the implementation of the European Union, which was created to advance economic and social unity among the peoples of Europe and to propel Europe to greater prominence in the international community. Here my point is that whether being out of the EMU policies and not adopting the Euro is good for the UK or not. Second, I am going to examine what are the implications of the British policy on this issue to the European integration. Now, I am starting my topic with the explaining the history of EMU.
PART 2. EUROPEAN MONATERY UNION AND THE MAASTRICHT TREATY
History of the EMU
A first attempt to create an economic and monetary union between the members was in 1979, the European Council adopted the European Monetary System, known as EMS, which employed an exchange rate mechanism to encourage participating countries to keep the fluctuations of their currency exchange rates within an acceptable band. In 1988, Jacques Delors, the president of the European Commission, proposed a three-stage plan to reach full economic union, including the establishment of a European Central Bank and a single currency which would replace any existing national currencies. The Commission was asked to propose a new timetable with clear, practical and realistic steps for creating an economic and monetary union. With each stage, the monetary policies of the participating countries would become more closely banded together, culminating in full convergence in the EMU.
The Maastricht Treaty: Founding Document for the EMU
The Maastricht Treaty provided a road map for the unification of the currencies of European Union members. The Maastricht Treaty formalizes plans for the EMU, which founded the European Union. The treaty led to the creation of the euro, and created what is commonly referred to as the pillar structure of the European Union and it constitutes a turning point in the European integration process. The Maastricht Treaty was signed in 1992, and subsequently ratified by all of the member states. The Treaty set up the conditions, which each member state in the European Union must meet before it could join the EMU. These conditions for EMU membership were considered necessary because when the member states join the EMU, domestic economic crises in one member state will affect all of the other member states. Before being members of the EMU some criteria had to be met by member states: reduction of inflation and interest rates, control of government deficit and debt and respect of normal fluctuation margins provided for by the exchange-rate mechanism on the European Monetary system.
The Founding Member States of the EMU
Eleven of the fifteen European Union member states initially qualified to join the EMU in 1998. Those states were: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. As part of the EMU, these eleven countries now make up the world’s second-largest economy, after the United States. Some analysts have suggested that only by using flexible definitions did Belgium and Italy meet the deficit-related criteria. Two countries, Greece and Sweden, failed to meet the conditions for joining EMU in the first round. The two remaining members of the European Union, my point, the United Kingdom and Denmark, chose not to join the EMU immediately. Both of these countries made provisions in the Maastricht Treaty that preserved their right not to join the EMU. To ensure stable currency exchange rates among all of the European Union member states, the currencies of those states that did not qualify to join the EMU or that chose not to participate in the EMU initially were linked to the single European currency of the EMU, the euro, by a new currency exchange rate mechanism.
The Launch of the Euro
In the 1992 Maastricht Treaty, The euro was established. In order to participate in the currency, member states are meant to meet strict criteria such as a budget deficit of less than three per cent of their GDP, a debt ratio of less than sixty per cent of GDP, low inflation, and interest rates close to the EU average. In the Maastricht Treaty, the United Kingdom and Denmark were granted exemptions per their request from moving to the stage of monetary union which would result in the introduction of the euro. Eventually, on January 1, 1999, the currency exchange rates of the eleven participating member states became permanently fixed, marking the beginning of the third and final phase of the EMU. On this date, the euro became a legal currency. On the first of January, 2002, the participating countries must begin to remove their national currencies from circulation. By the first of July 2002, the old national currencies will no longer be legal tender, and all transactions from that date forward in the participating EMU states must be conducted in euros. Once they are retrieved from circulation, the old national coins and banknotes will be destroyed.
As an integral part of the EMU, a new monetary institution was founded in Frankfurt, Germany-the European Central Bank, or ECB. The ECB sets monetary policy for the EMU independently from the influence of any of the national governments or any other outside influence. The ECB together with the central banks of all of the states in the European Union form the European System of Central Banks, or ESCB, which is charged by statute with maintaining price stability. The ESCB implements the monetary policy of the ECB, and administers the foreign exchange reserves of the participating member states, among other tasks.
Advantages of the Euro
There are several advantages of single currency, the euro. The most obvious benefit of adopting a single currency is to remove the cost of exchanging currency which eliminates the cost of doing business between the European states. Competitive environment in the market would expand and this may result in lower prices for consumers. Euro will stimulate economic growth and may reduce the unemployment rates since stability and efficiency increases in the participating member states. International investors will likely diversify their portfolios with Euros, encouraging more investment in the European continent. The European states want the euro to become one of the premier currencies in the international financial market, alongside the dollar and the yen. After the introduction of the euro, its exchange rate against other currencies fell heavily, especially against the U.S. dollar. This may be a sign of a strong impending currency in international market.
Criticisms of the EMU
Concerns about the EMU center on loss of national sovereignty for each of the individual participating states. This means the country can no longer conduct monetary policy on its own behalf. Some fear that the participating states may not be able to pull out of a national economic crisis without the ability to devalue its national currency and encourage exports. Some also worries about tax breaks to create a more competitive environment for companies which they would not welcome. The inconsistency of the euro area economy or as often expressed the economic divergences between economies within the euro area could challenge the viability of the EMU. Some fears that a one-size-fits-all monetary policy will leave some regions lingering in recession, while others grow so fast, they overheat the zone. Europe may not constitute an “optimum currency area” because the business cycles across the various countries do not move in synchronicity.
PART 3. COSTS AND BENEFITS OF INTEGRATION OF THE UK TO THE ECONOMIC MONETARY UNION AND SINGLE EUROPEAN CURRENCY
The introduction of a single European currency is sometimes seen as the final stage in the development of a single market in Europe. A Europe without trade barriers where specialization and trade in accordance with the Law of Comparative Advantage will lead to greater production and living standards. Most of the EU countries have already joined the first stage of monetary union by meeting the initial convergence criteria and fixing their currencies to the Euro.
If Britain joins the Euro, it will likely be in 2003. The government has offered the British public a referendum on Britain’s entry into EMU was a political or an economic decision. Jack Straw, Home Secretary, has stated that a decision will almost certainly be a political one whereas the Chancellor, Gordon Brown, has stated that the ‘Five Tests’ will determine whether the UK joins the Euro. Meanly, any decision of the government will be an economic one. It will be useful to acknowledge the ‘Five Tests’:
1. Are business cycles and economic structures compatible so that we and others could live comfortably with Euro interest rates on a permanent basis?
2. If problems emerge is there sufficient flexibility to deal with them?
3. Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?
4. What impact would entry into EMU have on the competitive position of the UK’s financial services industry, particularly the City’s wholesale markets?
5. In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?
The UK Treasury was given the task of assessing the tests without any suppress from political leadership. Eventually, the Treasury concluded that the UK economy was neither sufficiently converged with that of the rest of the EU, nor sufficiently flexible to apply for membership.
The Euro’s competitiveness against pound and the US dollar was poor, and the relative performance of the European and UK/USA economies was law. However, unemployment in Germany, once the economic power-base of Europe, is high. In July 2002, in Germany consumers protested companies by blaming that they increased the prices with introduce of the Euro.
A single currency means that there are no longer separate national monetary policies, and instead a new central bank has been set up – The European Central Bank – that conducts a Europe wide monetary policy, in particular the setting of interest rates. That means a loss of separate national monetary policies – interest rates and exchange rates. A supply side shock leading inflation and rising unemployment would not be responded by the national government. Given the structural rigidities in European labor markets there is unlikely to be downward wage flexibility. In the UK the government can change the inflation target. As being a member of EMU, whenever Germany experiences high inflation or high unemployment rates, she cannot fight against them.
These are some of the arguments put forward for Britain joining the Euro
Opposition to European Monetary Union (EMU) from the left is grounded on a belief that EMU continues a tradition of overvaluing sterling in fixed exchange rate regimes. Though such over-valuation has occasionally been imposed, there is no clear evidence that periods of floating exchange rates have actually delivered the flexibility that is theoretically promised.
Now, I am going to put the arguments of proponents of EMU membership that how Gordon Brown’s ‘Five Tests’ for UK participation are largely met.
Firstly, the exchange rate gives little ground for optimism about its role as a stabilizer when Britain’s Exchange rate is floating. Even without a floating exchange rate, relative labor costs can still adjust by changes in the wage rate and labor; markets are currently attaining a flexibility that makes this feasible. Opponents of the EMU offer only textbook systems as an alternative; in reality floating exchange rates do not deliver stable and well-aligned exchange rates. Therefore, 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. Eliminating exchange rates between European countries eliminates the risks of unforeseen exchange rate revaluations or devaluation.
The EMU will be stronger and more resilient than the Exchange Rate Mechanism and will not be susceptible to the speculative attacks on the currency seen during the 1990s. It was difficult to recommend locking into the Euro at the rates prevailing in the late ‘90s through to 2007. The failure of the earlier ERM is not evidence against a currency union since individual countries possessed separate currencies and monetary policies within that system.
Secondly, a European central bank will focus on economic conditions across the community and so will have a less volatile interest rate policy than the Bank of England, or other central banks. The credibility that attaches to the monetary policy of a European-wide central bank will render the Euro a strong currency and thus permit lower interest rates than at present within the UK – investment and growth are obvious beneficial consequences.
The prospect of sustained low-inflation under the responsibility of an independent European Central Bank should reduce long-term interest rates and stimulate sustained economic growth and competitiveness. The UK has a successful flexible labor market that would be highly effective inside a single currency area. Though the EMU might restrain independent fiscal policy, it will not totally remove the opportunity.
Thirdly, since around 20% of UK transactions are already dominated in US dollars, the demise of sterling will not produce totally unfamiliar circumstances. A common currency removes a significant barrier to free competition across national borders. A single currency promotes price-transparency – customers can readily assess the relative prices of similar products from anywhere within the union.
Fourthly, the large Euro zone will integrate the national financial markets, leading to higher efficiency in the allocation of capital in Europe. The UK will benefit from an increase in intra-European trade flows and higher capital investment resulting from the development of a single currency. The UK has been a major recipient of foreign direct investment in recent years. Some commentators believe that this would be threatened by non-participation in the currency union.
A single currency will be an important complement to the Single European Market, which would make the European Union a more powerful player in the global economy, and the UK might benefit from full-scale participation in this. One country can no longer devalue its currency against another member country in a bid to increase the competitiveness of its exporters.
Fifthly, a European currency will strengthen European identity. Federal Europe is not necessarily going to be a consequence of a shared single currency.
Sixthly, the new Euro will be among the strongest currencies in the world, along with the US Dollar and the Japanese Yen. It will soon become the second most important reserve currency after the US Dollar. Britain stands to lose political as well as economic influence in shaping future European economic integration if it remains outside a new system.
These are some of the arguments put forward against Britain joining the Euro
Currency unions have collapsed in the past. There is no guarantee that EMU will be a success. Indeed the Euro may be a recipe for economic stagnation and higher structural unemployment if the European Central Bank pursues a deflationary monetary policy for Europe at odds with the needs of the domestic UK economy.
It is quite possible that the monetary union will not be sustainable; countries that discover themselves to be in difficulty may cancel their membership and re-establish an independent currency and an inflationary monetary policy. The example of Ireland’s departure from the sterling currency area suggests that leaving a currency union is beneficial, rather than joining one.
In theory, a currency union can offer economic benefits – but only under fortunate circumstances. The lack of exchange rates removes a very effective mechanism for adjusting imbalances between countries that can arise from differential shocks to their economies.
There is a risk of losing the monetary policy instruments. For example, the exchange-rate policy, or the monetary policy – interest rate policy at national level. In a recession, a country can no longer stimulate its economy by devaluing its currency and increasing exports. The EMU is a step in a process that will cut Europe off from the rest of the world. It is bureaucratically motivated – a further advancement for European policy makers, by non-elected persons.
Entry would mean a permanent transfer of domestic monetary autonomy to the European Central Bank implying giving up flexibility on exchange rates and short-term interest rates. Domestic monetary policy would no longer be able to respond flexibly to external economic shocks such as a rise in commodity price inflation. Because, the European Monetary System is based on price stability.
Substantial fiscal transfers will be needed for poorer countries within the EU along with a more activist European Regional Policy to reduce structural economic inequalities. The inconsistency of the euro area economy or as often expressed the economic divergences between economies within the euro area could challenge the viability of the EMU. The UK might not feel able to afford such large-scale intra-European transfers.
The Euro will not be an optimal currency area – the European economies have not converged fully in a real structural sense and at some stage in the future, there is a fear that excessively high interest rates will be set because of an inflationary fear in one part of the zone which is unsuited to another area. Europe may not constitute an “optimum currency area” because the business cycles across the various countries do not move in synchronicity. There are obvious structural differences within the countries of Europe so, even if EMU begins in a state of convergence, economic shocks, such as crisis of supply of primary products, will lead to imbalances and there will be no mechanism to restore the balance.
There are economic costs and risks arising from losing the option to devalue the domestic currency in order to restore international competitiveness. This might lead to growing social dislocation and rising economic inequality within the European Union. In a recession, a country can no longer stimulate its economy by devaluing its currency and increasing exports.
Since there will only be a Europe-wide interest rate, individual countries that increase their debt will raise interest rates in all other countries. EU countries may have to increase their intra-EU transfer payments to help regions in need.
There is no reason why the UK should not continue to attract foreign capital inflows even if initially outside the new currency arrangement.
Finally, there are almost no instances in modern times of a newly formed fixed exchange rate regime surviving for more than five years.
Three major factors make Britain’s membership in the Euro-zone in the near future extremely unlikely. It is both dangerous and unfortunate that no British government makes any reference to these fundamental technical structural problems. First, the structure of the British trade is rather different from that of most of her EU partners. Thus, whilst she tends to trade more and more with European countries, Britain steel conducts much of her trade with the US and other countries. In turn, this would always cause tensions for the pound sterling vis-à-vis the euro. Second, a much more serious problem for British citizens is that of the exaggerated influence of interest rate changes on mortgage rates. Many British citizens have unpleasant memories of steep hikes in mortgage rates during the last months of British membership of the old EMS. Consequently, before Britain could enter the euro-zone, this question would have to be properly researched and the relevant changes made to do the financing of the mortgage market. Third, the most easily remedied problem for British membership of the euro-zone is the fact that the UK is not a member of the new “EMS”