UK Membership of the Euro Book Report

  • Length: 5 pages
  • Sources: 5
  • Subject: Economics
  • Type: Book Report
  • Paper: #91849476

Excerpt from Book Report :



In favor of joining is the fact that the large eurozone will integrate the national financial markets, leading to higher efficiency in the allocation of capital in Europe. The Treasury's official assessment of its five economic tests acknowledged that EMU membership for the UK could enhance productivity by increasing trade flows between the UK and other EU nations; boost investment and stimulate competition in product markets. (Artis 2000)

EMU may help UK households with lower prices and higher wages. It may promote supply-side reforms in the EU, aid specialization and enhance the UK's comparative advantage in a host of industries over time. Britain's excellent labor market would be highly effective inside a single currency area, yielding increased investment from outside the EU. Britain has been a major recipient of foreign direct investment in recent years. By removing a money-obstacle and improving access to funding, EMU could also facilitate the development of UK-owned multinational enterprises.

Membership of the euro will assist consumers and businesses with price-comparison among EU countries, encourage cross-border trade and increase free-market pressures.

By contrast, here are some of the macroeconomic arguments put forward against membership:

Currency unions have collapsed in the past. There is no guarantee that EMU will be a success. What are the key lessons emerging from Greece's experience?

The Mundell-Fleming model has been used to argue that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy.

It is quite possible that the monetary union will not be sustainable; so countries that discover themselves to be in difficulty may cancel their membership and re-establish an independent currency and an inflationary monetary policy. (Example: Ireland's departure from the sterling currency area suggests that leaving a currency union is beneficial, rather than joining one.) (O'Beirne 1999)

Companies are shedding fewer employees after many of them had achieved better-than-expected results in 2009. The British economy benefited from the large amount of spending by the government and the BoE; the fiscal and monetary measures managed to give a boost to the economy and pull it out of recession.

The European Union warned the British government of failing to reduce the deficit by 2015 to the 3% ceiling put by the EU. Nonetheless, Britain's deficit is predicted to reach 12.1% of GDP this fiscal year of 2010-2011 before retreating to 4.7% of GDP by the fiscal year of 2014-2015.

In the final analysis of both sides of these arguments, there are several compelling pro arguments. Reduced exchange rate volatility for UK businesses and lower exchange rate transaction costs for both businesses and tourists will increase business prosperity. Ultimately, removing EU exchange rates has lowered the chances of unforeseen exchange rate devaluation.

The monetary policy of a European-wide central bank will eventually 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. (Wargitsch 2001)

Sustained low-inflation supported by an independent European Central Bank will lower long-term interest rates and encourage sustained economic growth and competitiveness. The EMU will be more adaptable and consistent than the preexisting Exchange Rate Mechanism and should not suffer the speculative attacks on the currency seen during the 1990s.

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.

In conclusion, it is readily apparent that there are significant and substantive macroeconomic implications to the UK's decision vis-a-vis the euro, whatever determination is made. The important matter is to evaluate and weigh them in advance, and disseminate the issues carefully to the public.

References

Artis (2000) Should the UK Join Emu? National Institute Economic Review, Vol. 171,

No. 1, 70-81

Garganas (2003) Exchange-Rate Regimes on the Road to EMU: Lessons from Greece's

Experience, Seminar on "Monetary Strategies for Accession Countries," Hungarian

Academy of Sciences, Budapest.

O'Beirne (1999) Managing the Euro in Information Systems: Strategies for Successful

Changeover, Addison Wesley 183 pages

Policy Frameworks in the UK and EMU, HM Treasury, Crown copyright 2003

Mimford (2002) Should Britain Join the Euro?: The Chancellor's Five Euro Tests (Paperback)

Institute of…

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