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.
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Table of Contents
1. Historical introduction of the EMU
2. Discussion on Britain’s decision whether to join the EMU
2.1 Recent developments since 1. January 1999
2.2 Macroeconomic perspectives
2.2.1 Advantages
2.2.2 Disadvantages
3. Conclusion
Objectives and Research Themes
This coursework examines the ongoing debate surrounding the potential entry of Great Britain into the European Economic and Monetary Union (EMU). It analyzes whether such a transition is economically advisable given the specific structural and cyclical conditions of the UK economy in the context of the European Union.
- Historical framework of the European Monetary Union and its convergence criteria.
- Macroeconomic benefits of a common currency, including transaction cost reductions and market transparency.
- Macroeconomic risks and challenges, such as the loss of independent monetary and exchange rate policies.
- Theoretical evaluation using the Optimal Currency Area (OCA) theory.
- Assessment of business cycle convergence between the UK and the Eurozone.
Excerpt from the Book
2.2.1 ADVANTAGES
Lower costs of exchange:
“Perhaps the strongest economic argument […] for implementing the single currency is the reduction (or elimination) of currency-conversion transaction costs”, (Soper, J C, 1999): As transaction costs fall, trade is fuelled. Of course banks or firms can also reap the same benefits by carrying out their transactions in euro rather than in sterling. However, according to Wren-Lewis, S (2000) permanent savings in transaction costs just account for 0.3 to 0.6 percent of GDP.
The basic argument of euro advocates is that manufacturer cost savings would finally result in a fall of consumer prices. Sober, J C (1999) however points out that, an increase of trade within the euro zone may have trade-destroying on countries outside the currency area, as they are excluded.
Exports and Trade:
Trade will not only be fuelled by a reduced exchange rate risk, but also through increased exports to the mainland, that become cheaper with the euro. More than 55% of Britain’s exports go to Europe mainland, according to BBC (2001).
Summary of Chapters
1. Historical introduction of the EMU: Outlines the formation of the EU and the EMU via the Maastricht Treaty, specifically detailing the convergence criteria required for member states.
2. Discussion on Britain’s decision whether to join the EMU: Provides an overview of the political and economic context in Britain, including the five economic tests and the debate on potential macroeconomic advantages and disadvantages.
3. Conclusion: Synthesizes the arguments and suggests that Britain should not rush into joining the euro, emphasizing the need for greater business cycle convergence.
Keywords
EMU, Euro, Britain, Monetary Policy, Exchange Rate, Convergence Criteria, Macroeconomics, Transaction Costs, Business Cycle, Optimal Currency Area, European Central Bank, Investment, Trade, Economic Assessment.
Frequently Asked Questions
What is the primary subject of this paper?
The paper explores the economic debate regarding whether the United Kingdom should join the European Economic and Monetary Union (EMU) and adopt the Euro as its currency.
What are the core themes addressed in the text?
The text focuses on macroeconomic perspectives, including the benefits and costs of monetary union, political developments in the UK, and the theoretical requirements for an optimal currency area.
What is the central research question?
The central question is whether it is economically beneficial for Britain to relinquish its independent monetary policy and join the EMU, considering the potential impact on exports, investment, and business cycles.
Which scientific methodology is utilized?
The work utilizes a literature-based analysis, synthesizing existing economic theories—such as the Optimal Currency Area theory—and contemporary reports and data from sources like the HM Treasury and academic experts.
What is covered in the main body of the paper?
The main body examines historical developments, recent political pressure on the UK government, potential advantages like reduced transaction costs, and significant risks like the loss of autonomous interest rate adjustments.
Which keywords define this work?
Key terms include EMU, Euro, Britain, Monetary Policy, Business Cycle, Convergence Criteria, and Optimal Currency Area.
Why is the business cycle a critical factor in this debate?
The paper argues that if the UK business cycle is not convergent with that of the Eurozone, the UK cannot effectively respond to country-specific economic shocks without an independent exchange rate.
What is the author's final recommendation?
The author advises against a hasty decision, suggesting that Britain should wait until there is clearer evidence of business cycle convergence and a more favorable economic environment.
- Arbeit zitieren
- Florian Langhammer (Autor:in), 2001, The Euro - Should Britain join the European Monetary Union?, München, GRIN Verlag, https://www.grin.com/document/24171
