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Do the advantages of economic and monetary union outweigh the disadvantages?

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Introduction

EU10110 - European Integration Coursework essay: "Do the Advantages of Economic and Monetary Union Outweigh the Disadvantages?" (1634 Words) Pages: 9 Benjamin M. Unsworth (010800186) Do the Advantages of Economic and Monetary Union Outweigh the Disadvantages? "Euroland in grip of monetary paralysis"1 The European Economic and Monetary Union (EMU) is the most ambitious economic project undertaken in modern history. However, nearly every EU country has seen some kind of protest against monetary union, and three countries - Denmark, Sweden and the United Kingdom - have refused to participate (a fourth, Greece, did not qualify for economic reasons). Even Euro enthusiasts admit that there are a number of things that can go wrong. For the purpose of this essay, EMU is defined as a single market plus a single currency area, including a common external tariff vis-�-vis third countries, free movement of goods, services, capital and workers, a single currency and harmonisation of state's economic policies. First the context of the EMU's development will be presented, followed by the presentation of arguments in favour of EMU and against EMU. This essay is presented with a critical view towards EMU. Moves to EMU took place in the context of the collapse of the Bretton Woods international monetary system. The first serious attempt to tie together the value of national currencies came in the early 1970s, but collapsed in the face of turbulence in the global monetary system. ...read more.

Middle

The traditional short-term way for a nation to control this and create stability is to lower or raise interest rates. However, interest rates are specific to a currency and membership of EMU incurs a single rate of interest. EMU membership would therefore be too inflexible. This can be seen in Britain's economic crisis of 1991. Following withdrawal from the Exchange Rate Mechanism, Britain required 15% interest rates in order to control the economy and prevent total collapse. This interest rate may have been applicable to Britain, but it would be suitable to apply it to the other members of the EMU. If one EMU country suffered a boom or bust, the ECB would be caught in the dilemma of whether to let an economy collapse or hyper-inflate, or to introduce unsuitable interest rates to the other countries that would be unpayable or would in turn stimulate hyperinflation by overspending. A single rate of interest is therefore too inflexible for such a widely varied set of economies. The eleven-country Euroland makes such problems even more pronounced. The ECB initially set interest rates at 3%, and has since lowered them to 2.5%. Some politicians have complained that this is still too high. They should spare a thought for Europe's smaller economies. In Ireland, Spain and Portugal business is booming, and interest rates were high to prevent the economy from overheating. But already before the launch of EMU interest rates had to come down to the eurozone level and this has triggered higher rates of inflation4. ...read more.

Conclusion

However, each of the manufacturers are economic competitors and instead of being beneficial to the whole of the manufacturing sector, economic and monetary union would benefit the larger successful companies at the expense of farmers, smaller exporting companies and non-exporting companies who only target the domestic market. This is an inevitable feature of the capitalist system, which is only exaggerated by engaging more and more in globally cohesive trading (think globalisation - the rich few benefit more and more at the expense of the poor many - the third world is getting poorer and poorer. This would just be replicated within the EMU). EMU would only benefit the elite of the 10 per cent who export their goods. Conclusion The current main arguments supporting economic and monetary union centre around the benefits for the manufacturing sector, which would be shared out evenly and, coupled with the monetary stability that is generated, would enable stable economic growth for everyone. In this essay I have argued that this is in fact inaccurate because it overexaggerates the benefits, which would only be felt by the bigger businesses that are in a position to export their goods and reap the rewards of cheaper exportation costs. A single rate of inflation is too inflexible for the very divergent economies and the structure of the ECB is far too problematic. This 'one-size-fits-all' approach to economics is too idealist and does not take into account that each of the member states would solely be pursuing their own interests. ...read more.

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