The United Kingdom & the EU (the Single Currency) Introduction a) Why did not the UK join the Single Currency?

b) What advantages and disadvantages of the UK joining the single currency?

c) Actual news & opinions about a membership in the single currency.

Conclusion

The United Kingdom & the EU (the Single Currency) Introduction On 2nd May 1998 the European Commission in Brussels decided the membership of 11 EU-countries to the Euro Launching on 1st Jan. 1999.

The Euro-11-Zone includes: 300 million people 19,4% of the World-GDP 18,6% of the World-Trade

Timetable

1992 - Treaty of Maastricht 1994 - Founding European-Monetary-Institute 1995 - European Parliament settled a scenario in Madrid - these are the following three stages: Mai 1998 - Decision about the participants - 1st stage 1.1.1999 - Starting date 1.1.2002 - Bank notes issuing 1.7.2002 - The national currency is not valid!!

- 2nd stage - 3rd stage

a) Why didn’t the UK join the single currency?

1) The convergence criteria • An inflation rate that is no more than 1.5 % higher term than the average of the three lowest inflation rates. • A long term interest rate that is no more than 2% higher than the three lowest interest rates.

• A government budget deficit that is no higher than 3% of GDP.

• And government debt that is no higher than 60% of GDP.

2) Why did the UK opt out?

i) Economic obstacles ii) Political and social obstacles

i) Economic obstacles • The British economy is out of synch with the continental cycle.

• The UK does not have a high degree of interdependence in trade with the European countries (ref. table).

• The sterling is overvalued.

ii) Political and social obstacles • The EMU (European Monetary Union) is currently deeply unpopular with ordinary people.

• The British people are reluctant to enter in the single currency because they don ´t want to lose their identity.

• Another reason is their reluctance to suffer the predicted economic damage of the single currency.

b) What advantages and disadvantages of the UK joining the single currency?

1) Economic consequences of the UK opting out i) Disadvantages of opting out • The country, like other outsiders, will be very much affected by the policies adopted by the EMU members.

• All decisions which relate to monetary and exchange rate policy will be to reflect primarily the interests of the EMU participants.

• Its trading partners would dominate decision-making in key areas of EU policy.

• These partners would acquired a competitive advantage as a result of EMU’s success.

• The gain in competitiveness of the EMU group would, other things being equal, be equivalent to a loss of competitiveness among the countries outside.

Then, it will lead to : • Higher risk premium on interest rates • Greater exchange rate volatility  Lower rates of investment and growth  Higher unemployment and strains on government finances.

ii) Benefits of opting out : • The UK, like other “outs”, will be shielded from the counter-cyclical fiscal policy instability.

• It will also be spared the inevitable political frictions which will arise in the process of adjustment to a single monetary policy.

2) Consequences of the UK joining (in short or long term).

i) Costs or disadvantages of joining • Total costs for a business = £ 20 m •  costs from strategic changes to maximise the business competitiveness in the new Euro-zone environment.

 Costs in changing their systems in order to trade in Euro  Costs of transferring their base accounting systems to the Euro

• No transition period for the UK • Cost of the loss of independence in interest rate decisions • The UK, due to being a long-term Outsider, would be unlikely to have any serious influence on measures adopted by the EMU members.

Principle Advantages for the 11 members of the Euro-zone

• The domestic market needs a single currency i.e.: currency crises in autumn 92/summer 93 • Retirement of operation costs • Long-term economic stability • No exchange rate losses for companies i.e.: Germany lives up to 60 % from EU export • Abolition of barriers to a single European market • Price transparency

ii) Advantages of joining • Increased competition • 11-Euro-zone Countries = save 0.3 - 0.4 % of EU GDP p.a. The UK (transaction costs). = only 0.2 % of EU GDP p.a., because the UK trade with other EU countries is below average.

• Greater specialisation and trade within the Euro-zone • Euro will bring more integrated European financial markets.

Cqs : Higher growth in the Euro-zone

c) Actual news & opinions about a membership in the single currency.

How could UK join the s.c.?

Treasury sources are making clear • no decision until after the next election • the document gives the green light to speed up its preparations • that a decision could be made as late 2001, with Britain possibly joining economic and monetary union by 2003

Britain could switch to Euro in 40 months Decision Referendum UK Joins Euro Cash End 4 months 24-30 months 40 months 6 months

conclusion