The Euro - Should Britain join the European Monetary Union?

Should Britain join the EMU?

von: Florian Langhammer

TABLE OF CONTENTS

1. Historical introduction of the EMU 3

2. Discussion on Britain’s decision whether to join the EMU 4

2.1 Recent developments since 1. January 1999 4
2.2 Macroeconomic perspectives 4

2.2.1 Advantages 4
2.2.2 Disadvantages  5

3. Conclusion  8

4. Bibliography  9

5. Appendix  10

1. HISTORICAL INTRODUCTION OF THE EMU

With the Maastricht Treaty the EC heads of state and government agreed on a three-legged "European Union" (EU) on December 9 and 10, 1991, which should include a common foreign and security policy, cooperation on domestic and security policy and the creation of a European Economic and Monetary Union (EEMU).

The European Monetary Union (EMU) is to be effected according to a concrete time schedule - the three-stage plan which was agreed upon in the Maastricht Treaty and the conversion plan which was decided December 1995.

To ensure the stability of a single currency, especially in the initial phase, the states participating in the EMU must satisfy the following convergence criteria as constituted in the Maastricht treaty:

1. Inflation criteria: Price stability with no more than 1.5 percentage points above the inflation rate of the top three member states.
2. Interest rate criterion: Long-term nominal interest rates not more than 2 percentage points above the corresponding rate in the three member states with the best results in price stability.
3. Exchange rate criterion: Maintain the normal bandwidths in the exchange rate mechanism of the European Monetary System (EMS) for the last two years without strong tensions.
4. Financial policy criteria: The ratio between public sector deficit and GDP must be not more than 3% per year. Total public sector debt may not make up more than 60% of the GDP at market prices.

The monetary union started on January 1, 1999, where the 11 member states adopted the Euro as an official currency, the European Central Bank (ECB) took over the monetary policy with a focus on price stability at a low inflation rate.

Source: WestLB “Euro Information”

2. DISCUSSION ON BRITAIN’S DECISION WHETHER TO JOIN THE EMU

2.1 RECENT DEVELOPMENTS SINCE 1. JANUARY 1999

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