Should the UK become a member of the European Monetary Union?

Should the UK become a member of EMU?

Critically evaluate the pros and cons of this decision 
for the UK′s economy and business environment.


Business Environment UK

by

Helen Mueller

Background of EMU and current situation of the UK 3

Is Europe an Optimum Currency Area (OCA) and which role does the UK play? 4

What makes UK into a periphery country? 5

Pros and Cons 6

Arguments for joining EMU 6

Arguments against joining EMU 7

Conclusions 8

Appendices 10

Bibliography 14

Background of EMU and current situation of the UK

Since 1952 when the European Coal and Steel Community was founded the face of Europe has changed a lot. Barriers have been removed to enable goods, services, investment and people to move freely within the Community and politicians worked hard to get closer to the ideal of a political and economical united Europe. In two months the next major step will be taken by 12 nations of the European Union: The EURO will replace the old currencies. But Britain, although a member of the European Union, will not participate in Euro-zone in the foreseeable future.

In 1991 the Maastricht Treaty (Treaty on European Union) was signed in order to extend the Treaty of Rome (1957). One part of this Treaty was the formation of an economic and monetary union (EMU). Therefore the European Central Bank (ECB) was established and a new currency - the ECU, today called Euro. The ECB shall replace the national central banks and its "primary objective is to maintain a low and stable rate of price inflation for the euro currency." ¹⁾

Although Britain had joined the exchange rate system (ERS), the so called "parity grid" of the European Monetary System (EMS) in 1990 and had also signed the Maastricht Treaty it was forced to leave the EMS on Wednesday, 16 September 1992, known as "Black Wednesday". Sterling had dropped below the "floor" of the grid and all measures to support the currency failed.

The UK gained opt-outs from stage 3 of EMU during the Maastricht conference, which means: "UK shall notify the council whether it intends to move to the third stage, and that unless it does, it will be under no obligation to do so." ²⁾ Now, as the EMU comes closer the subject presses hard on the Blair-government but a date for the planned referendum, which shall bring a decision, is still not stated.

Is Europe an Optimum Currency Area (OCA) and which role does the UK play?

According to Mundell (1961) “an optimum currency area is an economic unit composed of regions affected symmetrically by disturbances and between which labour and other factors of production flow freely”. Artis (2000) states, “the costs of monetary union consist in resigning the possibility of using an independent monetary policy, and appropriate exchange rate changes, to deal with shocks that are asymmetric between the potential partner countries. This can be mitigated if the partners agree on a federal fiscal arrangement that cushions asymmetric shocks, if labour mobility between the partners is sufficiently high, or indeed if internal labour market flexibility is great enough.”

So the first criterion, the federal fiscal arrangement, is not featured in EU and although barriers for people have been removed, which allows employees to work in any member country, labour mobility is still quite low. On the other hand trade integration (the amount of intra-EU trade as a percentage of GDP) between the partner countries is quite high (appendix 1) and UK’s integration figures are even higher than those of Germany and France, while UK’s trade intensity (ratio of intra- EU to total trade) is just slightly lower than EU average.³⁾

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1) Bradley and Whittaker (2000)

2) Giordano and Persaud (1998)

3) Artis (2000)