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.
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Table of Contents
Background of EMU and current situation of the UK
Is Europe an Optimum Currency Area (OCA) and which role does the UK play?
What makes UK into a periphery country?
Pros and Cons
Arguments for joining EMU
Arguments against joining EMU
Conclusions
Objectives and Topics
The paper critically evaluates the potential economic and business implications for the United Kingdom regarding the decision of whether to join the Economic and Monetary Union (EMU). It analyzes the structural differences between the UK and the core Euro-zone nations to assess the feasibility of adopting the single currency.
- Theoretical evaluation of the Optimum Currency Area (OCA) criteria.
- Comparative analysis of business cycles and trade integration.
- Detailed breakdown of the benefits and drawbacks of Euro-zone membership.
- Examination of the "five economic tests" set by the UK government.
- Assessment of the UK's position as a periphery country within the European financial landscape.
Excerpt from the Book
What makes UK into a periphery country?
There are several differences between the UK and the core European countries, which are often considered as arguments against joining EMU:
Artis and Zhang (1997) state that the UK “business cycle was more closely linked to the US cycle than to the German one and that the ERM period had served to strengthen the appearance of a “European” business cycle affiliation in the case of most countries” (appendix 3)
“Britain's rates of unemployment, public sector spending and taxation levels are markedly lower than most euro countries”
Scobie (1998) argues that “ the British financial system is very different from that prevailing on the Continent” as the UK has a large proportion of households respectively businesses who have:
floating-rate mortgages
floating-rate overdrafts
while in most European countries mortgages and overdrafts are often fixed for a certain period. Also interest rates historically have been high and volatile in the UK, which differs completely from ECB’s aims.
Summary of Chapters
Background of EMU and current situation of the UK: This chapter outlines the historical development of the European Union and the formation of the EMU, while detailing the UK's specific political and historical stance regarding the Euro.
Is Europe an Optimum Currency Area (OCA) and which role does the UK play?: The chapter applies the economic theory of Optimum Currency Areas to evaluate whether the EU satisfies the necessary conditions for a unified currency, specifically focusing on labor mobility and trade integration.
What makes UK into a periphery country?: This section identifies structural and cyclical disparities between the UK and core European economies, such as business cycle synchronization and differences in financial system characteristics.
Pros and Cons: This chapter provides a comprehensive list of economic arguments, contrasting the potential gains from transactional cost reduction and stability with the risks of losing fiscal sovereignty and monetary policy flexibility.
Conclusions: The final chapter summarizes the complexity of the decision, highlighting the influence of political factors, business attitudes, and the ambiguity of the "five economic tests" in determining the UK's future course.
Keywords
Economic and Monetary Union, EMU, Euro-zone, United Kingdom, Optimum Currency Area, OCA, Maastricht Treaty, European Central Bank, ECB, business cycle, fiscal policy, inflation, exchange rates, trade integration, convergence criteria.
Frequently Asked Questions
What is the primary focus of this academic paper?
The paper examines the debate surrounding the potential membership of the United Kingdom in the Economic and Monetary Union (EMU) and the resulting impact on its economy.
What are the core thematic areas discussed in the text?
Key topics include the Optimum Currency Area theory, structural differences between the UK and European core countries, trade integration figures, and the various pros and cons of adopting the Euro.
What is the central research question addressed by the author?
The paper seeks to critically evaluate the pros and cons of the decision for the UK to join the EMU, considering its unique economic environment.
Which scientific methodology is utilized in the study?
The author employs a qualitative comparative analysis, reviewing existing economic literature and empirical data (such as trade statistics and business cycle correlations) to assess the feasibility of Euro adoption.
What topics are covered in the main body of the work?
The main body covers the historical background of European integration, the theoretical framework of currency areas, a comparative analysis of the UK versus core European nations, and a detailed pros and cons list regarding the single currency.
Which keywords characterize the work?
The work is characterized by terms such as EMU, Optimum Currency Area, European Central Bank, fiscal sovereignty, and business cycle synchronization.
Why is the UK often referred to as a "periphery country" in the context of the EMU?
The text suggests that the UK's business cycles are more closely aligned with the US than with Germany, and its financial system—characterized by floating-rate mortgages—differs significantly from continental European models.
What is the significance of the "five economic tests" mentioned in the conclusion?
These tests represent the government's benchmarks for determining when it might be economically sound for the UK to join the EMU, though the author notes they are subject to political interpretation.
- Quote paper
- Helen Mueller (Author), 2001, Should the UK become a member of the European Monetary Union?, Munich, GRIN Verlag, https://www.grin.com/document/4168
