The Euro and the EMU
On 1 January 1999 a new single currency was born after years of negotiations and preparation in Europe - the Euro. Initially the Euro covers over 300 million people over 12 countries, which form the new European single currency area. They are: Germany, Ireland, France, Finland, Italy, Portugal, Belgium, Spain, The Netherlands, Luxembourg, Austria, Greece. Three European Union countries are staying outside the Euro for the moment: United Kingdom Sweden, Denmark. The 12 participating countries permanently and irrevocably fixed their exchange rates. The European Central Bank sets the interest rate throughout the Euro zone. From 1999 -2002 Prices will be displayed in Euros and national currency throughout the Euro zone, On 1 January 2002 Euro coins and notes came into circulation. On 1 July 2002 all national coins and notes could be withdrawn from circulation.
During the procedure of creating the Euro, the EMU and the ECB acted as a decision maker. The EMU, Economic and Monetary Union (EMU), is the single currency area within the European Union single market in which people, goods, services and capital move with minimal restrictions. It is intended that EMU will create the framework for economic growth and stability. Emu works in two fundamental ways. First, there are potential efficiency gains, such as the savings on the costs of exchanging one currency for another, and their likely effects on growth. Secondly, there are the gains that can be expected from reducing risks, such as the risk that your investment or export order will be made unprofitable by an exchange-rate change. These reductions in risk also encourage trade, investment and growth. The rules, institutions and objectives of EMU are set down in the Maastricht Treaty. Economic and Monetary Union is based on two concepts: the co-ordination of economic policies and an independent monetary institution, the ECB. The Council of Finance Ministers (which brings together the ministers for economic affairs and finance of the member states) is responsible for defining the major principles of economic policy. It can put pressure on the participating states for them to respect their budgetary commitments. Although the ECB makes the big monetary policy decisions, the national central banks implement them in their own countries. All eurozone national central banks contribute to monetary policy decisions through membership of the ECB's governing council. National central banks will continue to be responsible for the delivery of non-core central banking tasks which vary from country to country. National central banks of member states not participating in the euro area have a different status to eurozone central banks - they are members of the third-tier extended general council rather than the second-tier governing council. They are allowed to participate in the consultative and co-ordinating functions of the ECB and can contribute to statistical data. Non-EMU central banks cannot contribute to monetary policy for the eurozone. European System of Central Banks is a network made up by the ECB and all national central banks from the EU. The Euro system refers to the ECB and the national central banks of the member states which have adopted the euro. It is a complex relationship the ECB is more powerful, yet the national central banks are also the shareholders in the ECB. The national central banks of Member States not participating in the euro area have a different status, which permits them to conduct national monetary policies, but not to take part in deciding and implementing monetary policy for the euro area. Of course, it is only monetary policy that must be the same throughout a monetary union. The Maastricht rules create a permanent and unqualified prioritization of the control of inflation and place policy in the hands of central bankers, who are by intention less accountable than been in a democracy. This is no accident. It is a deliberate response to the doctrine of policy credibility. Revocable commitments can be revoked, therefore only irrevocable ones are persuasive. Thus the statutes of the European Central Bank can be changed only by the unanimous agreement of every national parliament, and in some cases national referenda as well.
What should Britain take into account?
The Euro is a very simple change: one currency replaces twelve national ones. But this event comes with a whole series of economic consequences. Much of the attention given to EMU concerns how it would affect the big decisions in the economy, such as interest rates and exchange rates. These are very important. Questions of political sovereignty, federalism or supranational should be considered as well.
Pro’s of The euro
Economically, the main advantage of the single European currency is the fact that it would cause prices to be greatly reduced. At the moment, Great Britain has been given the label of “Rip-off Britain” due to the frequent extortionate prices which we are charged for goods compared to other countries. The single European currency would allow trading to take place much easier, without the need for exchange rates and currency commission. Easier trading would mean that some countries can specialise in one good or service whilst other countries specialise in others. This would mean that there are more goods available to consumers at a lower price, and lower prices means people have more money to spend on other goods, so there will be a higher standard of living. Also, goods would be able to be transported for free between participating countries. So by joining the European currency, there would be more trade available and therefore a wider choice of goods and services to choose from.
Another main benefit is that a fixed exchange rate would act as an anchor against inflation. Countries such as Italy and the United Kingdom have seen this as an effective way to break inflationary expectations in the labour market, in part by the implied reduction in the discretion of national policymakers. Low-inflation countries such as Germany, however, are concerned about whether the ECB would continue to follow the conservative monetary policies of their national central banks.
The single European currency´s ease of trade would allow the easy establishment of Trans National Corporations (TNC´s), which in turn would create more jobs for more people on a greater geographical scale. This would mean that benefits would be lowered, as not as many people need to claim them. The money saved from benefits would mean that more money is available for public spending, so public services, such as the NHS would be able to offer more quality services.
Politically, Britain cannot become one of the leading countries in the EU so long as it remains outside the euro. The opportunities for Britain to assume a leading role are great. The Franco-German special relationship is in an extremely troubled state. And with ten countries likely to join the EU in 2004, France and Germany - even if they could once again becomes close friends - will no longer have the ability to set the Union's agenda. Both the French and the Germans are also ready to develop closer ties with the UK on specific issues. The French are looking to British help in developing an effective EU foreign policy and on institutional reform. Germany wants British support on economic reform and trade. But neither country is prepared to fully trust the British so long as they are outside the euro and thus uncommitted to the common destiny of the euro zone countries.
The above arguments seem to convey a very positive view of the single European currency. But on the other hand, there are many reasons why people believe Britain should not participate.
Con’s of the Euro
Political arguments include the loss of Britain’s individuality as a separate country, as well as the loss of nearly all control over the UK economy. Furthermore, adopting the Euro more or less ties Britain into any future plans of a Federal Europe. It would be hard to back out of such plans with so much integration already set in motion. This, of course, would mean the loss of political sovereignty for Britain. Furthermore, looking at the moral aspects of the argument, the loss of their own currency would be a loss of Britain’s heritage, independence, and freedom. Many people do not want to see the face of the Queen banished from the head of our coins to be replaced by something unfamiliar and European. The British nation has a reputation of independence – being own little island away from mainland Europe. Many people believe the Euro will take that away from them.
Economically, each country joining the single European currency must meet the convergence criteria. One part of this convergence criteria is the fact that a joining country´s government borrowing deficit must not be more than 3% of that country´s GDP. But in Great Britain, the borrowing deficit is 6%, and the reduction of this figure would require public expenditure to be cut by an astronomical £18 billion, or an alternative would be to raise income tax 9p to 33p per pound and/or VAT from 17.5% to 24.5%. The public would definitely not appreciate these cuts. It is estimated that these cuts would raise unemployment by approximately a minimum of 500,000. This would mean more people claming unemployment benefits. A single monetary policy cannot deal with the differences, divergences and cyclical variations in the European economies. National currencies provide an adjustment mechanism, and allow governments to use interest rates to respond to events. A single European currency would remove these options. Instead, a single European interest rate, set by the European Central Bank in Frankfurt, would apply indiscriminately to the whole single currency area. This creates the problem of how a participating country could adjust to a shock or economic development specific to that country.
Conclusion
To sum up, as you can see, there are two sides to this debate, both providing strong arguments. A final important point is by providing that the Euro does complete its launch successfully, it is difficult to see how the UK can afford to remain outside the Euro economically and politically. It will risk being marginalised in the EU if it fails to join within a few years. At present the public opinion in the UK is against joining the Euro, and for keeping the pound. This is entirely natural and understandable. Almost all change is resisted for various reasons, mainly psychological. Fear of the unknown, laziness in trying to avoid the extra the adaptation will require. Other European countries have overcome their inertia and fear, and it may be asked why Britain should be a special case. The fact that the UK is an island adds to the natural reserve of its inhabitants. The British rarely bother to learn other languages, and cross national borders less frequently than their mainland counterparts. Another reason for greater inertia is that the British have had their own currency the pound for much longer than many other European nations, and been invaded and conquered less frequently and less recently.
In my opion Britain will join the Euro inevitablly, and Britain has started moving towards it. It is only a question of time how long Britain can afford to remain out of it. Sweden and Denmark also can hardly afford to remain apart from the Euro for more than a few years. Within a few years, the government will be spending its advertising dosh to persuade us that the Euro is a desirable necessity.
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