Since the beginning of the idea of the European Monetary Union (EMU), UK had a negative attitude towards a single monetary policy with a single currency. This antipathy was amplified on the one hand by the withdrawal of the European Exchange Rate Mechanism in 1992 caused by different economic policies, oil price rises and German unification and on the other hand by the
launch of the EMU in 1999. In fact the UK government starts to work towards cooperation with the EMU by setting specific goals. But before taking further steps, the criteria of the Maastricht Treaty have to be fulfilled and the five economic tests assessed by the UK government have to be passed. Since 1997 the UK has made real progress towards meeting the five economic tests.
Although there are arguments that in a long term the payback of joining EMU offset the costs, the benefits are too low and the costs too high at the moment. The idea of one currency in Europe has been around for many years. But according to Pitchford the true launching of the EMU process dates from the Werner Committee which was set up in 1970 and submitted its final report, called 'the Werner Report', in February 1971. The first major step for the implementation of the Werner plan was the European 'currency snake' in
1972. Through this arrangement the fluctuations between participants' exchange rates should be limited to ± 2.25%. However, this process was not effective because of the collapse of the Bretton-Woods regime which determined a fixed exchange rate in terms of gold. The UK joined the snake system just for one month.
A further step was the creation of the European Monetary System (EMS) in 1979. The main objective of this system was to create monetary stability in Europe. This should be realized by the fixed rates between the currencies of the participating countries which where settled on their value against the European Currency Unit (ECU4). The UK did not join in the EMS and was still remote at the time of Delors Report in 1989.
Table of Contents
1 INTRODUCTION
2 THE DEVELOPMENT OF THE EMU
3 THE BRITISH PUBLIC OPINION
4 THE FIVE ECONOMIC TESTS
5 THEORY OF OCA
5.1 THEORIES ABOUT THE BENEFITS JOINING AN OCA
5.2 THE COST-BENEFIT FRAMEWORK OF OCA
6 BUSINESS CYCLE
7 CONCLUSION
Objectives and Core Topics
This paper examines the economic feasibility and political implications of the United Kingdom adopting the Euro as its currency, focusing on whether the UK's economic structure aligns with the requirements of the European Monetary Union (EMU).
- The historical evolution and development of the EMU.
- Public opinion and skepticism within the United Kingdom regarding European integration.
- The application of the "Five Economic Tests" as the framework for UK assessment.
- Theoretical analysis of Optimum Currency Areas (OCA) and business cycle synchronization.
Excerpt from the Book
5.1 Theories about the benefits joining an OCA
According to Frankel, two issues determine the benefits of a currency union. On the one hand is the degree of openness, which can be explained by amount of trade between the partners; on the other hand is the correlation of incomes within these partner countries. In his theory countries sharing a certain level of either openness or income correlation, but in both cases countries find it beneficial to have one single currency. Figure 2 shows the trade-off by the downward sloping 'OCA line' which illustrates the combination of the two issues.
Countries on the left side of the OCA line would take the advantages of a monetary independence. In contrast, partner countries beyond the line would benefit from a common currency. Taking this into account the euro area is placed on the right side (draw net benefits from the euro) and the UK on the left side. It has to be mention that the OCA attributes develop over the time: the members of the EMU increased mutual trade by ca 60% as a result of elimination of trade and financial barriers, less transportation costs and a stable exchange rate regime. Nevertheless there is a disagreement about the level by which income correlation increases or declines in the implementation of a common currency and a rise in trade.
Summary of Chapters
1 INTRODUCTION: Outlines the negative attitude of the UK towards a single currency and introduces the Maastricht Treaty criteria and the five economic tests.
2 THE DEVELOPMENT OF THE EMU: Provides a historical overview of the evolution from the Werner Committee through the Delors Report to the implementation of the Euro.
3 THE BRITISH PUBLIC OPINION: Analyzes the persistent skepticism and hostility of the British population toward the EMU based on various surveys and polls.
4 THE FIVE ECONOMIC TESTS: Explains the criteria established by the UK government under Gordon Brown to evaluate if the UK should join the Eurozone.
5 THEORY OF OCA: Details the economic theory of Optimum Currency Areas and examines the relationship between trade integration, income correlation, and monetary union.
5.1 THEORIES ABOUT THE BENEFITS JOINING AN OCA: Discusses the trade-off between openness and income correlation in the context of currency unions.
5.2 THE COST-BENEFIT FRAMEWORK OF OCA: Illustrates the cost-benefit analysis of joining a monetary union, specifically considering trade integration and asymmetric shocks.
6 BUSINESS CYCLE: Evaluates the synchronization of the UK business cycle with the Eurozone and the US.
7 CONCLUSION: Summarizes the findings, concluding that present participation in the EMU is not in the national economic interest of the UK.
Key Terms
EMU, Euro, Optimum Currency Area, OCA, Maastricht Treaty, Five Economic Tests, Business Cycle, Exchange Rate, Trade Integration, Monetary Policy, European Central Bank, Inflation Target, Convergence Criteria, Economic Stability, British Public Opinion
Frequently Asked Questions
What is the central focus of this research paper?
The paper investigates whether it is economically and politically advantageous for the United Kingdom to enter the European Monetary Union (EMU) and adopt the Euro.
What are the primary themes covered in the study?
Key themes include historical monetary developments in Europe, the evolution of the UK's public sentiment, the theoretical framework of Optimum Currency Areas, and an assessment of the "Five Economic Tests."
What is the main research question or objective?
The objective is to determine if the UK meets the necessary economic convergence and flexibility criteria to benefit from replacing the pound sterling with the Euro.
Which scientific methodology is applied here?
The author uses a descriptive analysis based on economic theory—specifically the OCA theory—and incorporates empirical data from government assessments, Treasury reports, and comparative economic studies.
What topics are discussed in the main body of the work?
The main body examines the historical timeline of the EMU, analyzes public opinion data, defines the Five Economic Tests, discusses OCA theory paradigm shifts, and compares business cycle fluctuations between the UK and the Eurozone.
How would you describe this work using keywords?
The work is characterized by terms such as EMU entry, economic convergence, Optimum Currency Areas, fiscal policy, business cycle synchronization, and UK monetary sovereignty.
Why did the UK government introduce the "Five Economic Tests"?
These tests were designed as an objective, evidence-based framework to decide whether joining the Eurozone would support stable and high levels of employment and economic growth for Britain.
What does the "endogeneity of OCA" paradigm suggest about the EMU?
It suggests that monetary integration is not just a result of existing economic alignment, but also a driver of further trade integration and business cycle synchronization among member countries.
How does the author characterize the current British stance on the Euro?
The author describes a persistently skeptical and cautious attitude, largely influenced by the perceived economic risks and the desire to maintain independent monetary policy control.
- Quote paper
- Hartwin Maas (Author), 2005, Should UK enter the EMU, Munich, GRIN Verlag, https://www.grin.com/document/113539
