Should the UK become a member of EMU? Critically evaluate the pros and cons of this decision for the UK's economic and business environment

COURSEWORK

Should the UK become a member of EMU?
Critically evaluate the pros and cons of this decision
for the UK′s economic and business environment

by

Rainer J. Wargitsch

Date: 20th November 2001

Content

1 Introduction 3

2 The European Economic and Monetary Union (EMU) and UK′s position 4

3 Is the European Union an Optimal Currency Area? 5
3.1 The theory of an Optimum Currency Area 5
3.2 Convergence criteria of the EU and UK′s test criteria 5

4 Pros for the UK as a member of EMU 6

5 Cons for the UK as a member of EMU 7

6 Conclusion 8

7 Appendices

8 Bibliography

1 Introduction

On January 1st 1999 the Euro (€) became the official currency in the participating countries inside the European Union. France, Germany, Spain, Portugal, the Netherlands, Belgium, Luxembourg, Austria, Italia, Ireland, Finland and Greece introduced this currency as the new single currency, while the national currency is still valid and in use, as the Euro is not yet available in coins and notes. Though the exchange rates between the currencies were irrevocably fixed. In less than two months, on January 1st 2002, the Euro will be introduced, and from that day on the Euro notes and coins are in use.

Despite of many advantages, that′ll be explained later in this coursework, a few countries of the EU did not join the European Economic and Monetary Union (EMU) and have not introduced the Euro. Sweden, Denmark and Great Britain refused to take part in the EMU and preferred to sustain their own currencies [Appendix 1].

This coursework faces the question whether the UK should join the EMU. I will analyse the advantages and the disadvantages of the EMU for UK′s economic and business environment.

2 The European Economic and Monetary Union (EMU) and UK′s position

"We have to create a sort of United States of Europe. Only in that way hundreds of millions of hard working people can regain the plain joys and hopes that make life worth living."¹ The European Monetary System (EMS) was introduced in 1979. It was created to minimize the risk of changes of exchange rates that hampered trade between the european countries. In this mechanism the currencies in Europe were tied together in narrow fluctuation bands of ± 2.25 % towards each other. Since 1993 this bands have been "temporary expanded"² to ±15 %. This system existed 1999 as the European Economic and Monetary Union (EMU) succeeded the EMS with its task to introduce the Euro as single currency.

The UK left the EMS after two years membership in 1992 on the so-called ′Black Wednesday′ on September 16th. Due to a "loss of trust in the EMS, where several EMScurrencies got under devaluation pressure"³, after there have been heavy differences between high interest rates in Germany and low interest rates in the USA, what made "finance flow towards the DM and out of US dollars and sterling."⁴

After heavy speculations on the stock markets in the beginning of September 1992 the British Pound fell below the bands of the EMS on September 16th. The British government "took drastic measures to attempt to maintain sterling′s position […] but neither was sufficient to prevent sales of sterling from reducing its rate against DM well below the EMS ′floor′ of DM 2.78. Sterling was withdrawn from the EMS system […] and allowed to ′float′."⁵

Another big topic is the public opinion in the UK. A big number of people do not want to give up the Pound for the Euro, which is regarded as inferior [Appendix 2]. The government still emphasizes the economic side of effects of joining the EMU, but it does not take much influence on the public opinion. The opposition uses the fear of the citizens to gain votes and tried to win the elections on June 7th 2001 on that topic.

[...]

1 Winston Churchill [1946]

2 Grupp, C [1997]

3 Thiel, E [1999]

4 Griffiths&Wall [1999]

5 Grittiths&Wall [1999]