Transcript The United Kingdom & the EU (the Single Currency)

The United Kingdom & the EU
(the Single Currency)
Introduction
a) Why did not the UK join the Single Currency?
b) What advantages and disadvantages of the UK
joining the single currency?
c) Actual news & opinions about a membership
in the single currency.
Conclusion
The United Kingdom & the EU
(the Single Currency)
Introduction
On 2nd May 1998 the European Commission
in Brussels decided the membership of 11
EU-countries to the EuroLaunching on 1st Jan. 1999.
The Euro-11-Zone includes:
300 million people
19,4% of the World-GDP
18,6% of the World-Trade
Timetable
1992 - Treaty of Maastricht
1994 - Founding European-Monetary-Institute
1995 - European Parliament settled a scenario in
Madrid - these are the following three stages:
Mai 1998 - Decision about the participants - 1st stage
1.1.1999 - Starting date
- 2nd stage
1.1.2002 - Bank notes issuing
- 3rd stage
1.7.2002 - The national currency is not valid!!
a) Why didn’t the UK join
the single currency?
1) The convergence criteria
• An inflation rate that is no more than 1.5 % higher term
than the average of the three lowest inflation rates.
• A long term interest rate that is no more than 2% higher
than the three lowest interest rates.
• A government budget deficit that is no higher than
3% of GDP.
• And government debt that is no higher than 60% of GDP.
2) Why did the UK opt out?
i) Economic obstacles
ii) Political and social
obstacles
i) Economic obstacles
• The British economy is out of synch with the
continental cycle.
• The UK does not have a high degree of
interdependence in trade with the European countries
(ref. table).
• The sterling is overvalued.
ii) Political and social obstacles
• The EMU (European Monetary Union) is currently
deeply unpopular with ordinary people.
• The British people are reluctant to enter in the single
currency because they don´t want to lose their identity.
• Another reason is their reluctance to suffer the
predicted economic damage of the single currency.
b) What advantages and
disadvantages of the UK joining the
single currency?
1) Economic consequences of
the UK opting out
i) Disadvantages of opting out
• The country, like other outsiders, will be very much
affected by the policies adopted by the EMU members.
• All decisions which relate to monetary and exchange rate
policy will be to reflect primarily the interests of the EMU
participants.
• Its trading partners would dominate decision-making
in key areas of EU policy.
• These partners would acquired a competitive
advantage as a result of EMU’s success.
• The gain in competitiveness of the EMU group would,
other things being equal, be equivalent to a loss of
competitiveness among the countries outside.
Then, it will lead to :
• Higher risk premium on interest rates
• Greater exchange rate volatility
 Lower rates of investment and growth
 Higher unemployment and strains on government
finances.
ii) Benefits of opting out :
• The UK, like other “outs”, will be shielded from the
counter-cyclical fiscal policy instability.
• It will also be spared the inevitable political frictions
which will arise in the process of adjustment to a single
monetary policy.
2) Consequences of the UK joining
(in short or long term).
i) Costs or disadvantages of joining
• Total costs for a business = £ 20 m
•  costs from strategic changes to maximise the business
competitiveness in the new Euro-zone environment.
 Costs in changing their systems in order to
trade in Euro
 Costs of transferring their base accounting
systems to the Euro
• No transition period for the UK
• Cost of the loss of independence in interest rate
decisions
• The UK, due to being a long-term Outsider, would be
unlikely to have any serious influence on measures
adopted by the EMU members.
Principle Advantages for the 11
members of the Euro-zone
• The domestic market needs a single currency
i.e.: currency crises in autumn 92/summer 93
• Retirement of operation costs
• Long-term economic stability
• No exchange rate losses for companies
i.e.: Germany lives up to 60 % from EU export
• Abolition of barriers to a single European market
• Price transparency
ii) Advantages of joining
• Increased competition
• 11-Euro-zone
Countries = save 0.3 - 0.4 % of EU GDP p.a.
(transaction costs).
The UK
= only 0.2 % of EU GDP p.a.,
because the UK trade with other EU
countries is below average.
• Greater specialisation and trade within the Euro-zone
• Euro will bring more integrated European financial
markets.
Cqs : Higher growth in the Euro-zone
c) Actual news & opinions
about a membership in the single
currency.
How could UK join the s.c.?
The Government’s National Changeover Plan shows that
Tony Blair aims to speed up the process.
The UK can
prepare more quickly than the first wave entrants managed.
Treasury sources are making clear
• no decision until after the next election
• the document gives the green light to speed up its preparations
• that a decision could be made as late 2001, with
Britain possibly joining economic and monetary union by 2003
Britain could switch to Euro in 40 months
Decision
Referendum
4 months
UK Joins
24-30 months
40 months
Euro Cash
6 months
End
conclusion