• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

UK Membership of the European Monetary Union.

Extracts from this document...


UK Membership of the European Monetary Union 1. Introduction In January of 1999, eleven from fifteen members of the European Union (EU) irrevocably locked their currencies together to become the European Economic and Monetary Union (EMU). Their new common currency, the euro, is now the currency for most of Western Europe. Now one of the biggest questions on the minds of the population is: Should the UK join with the rest of Western Europe in monetary union? 2. Arguments For UK membership: o Lower transactions costs and transparency Joining the Euro would reduce exchange rate uncertainty for businesses and lower transactions costs for companies and tourists. Nearly 60% of UK trade is conducted with other members of the European Union - a figure that is likely to grow in future years. Price differences, especially on big-ticket consumables such as cars, TVs, and washing machines, will become less sustainable and there will be greater price transparency. o Increased trade and investment The Euro is vital to the success of the Single European Market. This should lead to an increase in intra-European trade flows and higher inward investment within the EU region. Britain stands to gain from this, particularly if it can maintain low inflation and raise productivity in European markets. Britain's flexible labour and product markets would be highly effective inside a single currency area and would help to attract even more inward investment from outside the European Union. o Lower inflation and long term interest rates The UK might gain from a period of sustained low-inflation delivered by an independent European Central Bank. If inflation falls, this will lead to lower long-term interest rates and stimulate faster growth and improved competitiveness. The union will be less susceptible to speculative shocks and provides more certainty. The UK has been a major recipient and beneficiary of foreign direct investment in recent years and this might be threatened if the UK remained outside the system in the long run. ...read more.


Is this now true with the currency? Regionalism * If monetary union is inappropriate for Europe, then this argument could also be applied to parts of the UK, East Anglia and Northern Ireland for example. Britain's economy as a whole is more closely aligned with the European average than Northern Ireland is with Britain; regional variations within countries can be just as great as those between countries. * European economies are slowly becoming ever more naturally integrated with each other, mainly through the activities of international corporations. Trade Patterns * Modern trade is more about trade among businesses in the same industry. Thus the structure of developing economies, particularly Europe, is becoming more integrated, more similar, and less prone to shocks. Any change in consumer tastes is likely to affect Euro-land equally, as with cars for example. Nature of Debt * In the UK the highest consumer debt is mortgages, which are highly sensitive to interest rates - but there are more savers than borrowers. The move to EMU is likely to provide incentives to people to borrow at fixed interest rates for longer periods. Exchange Rate Flexibility and Devaluation Devaluations only work if they lead to a fall in the cost of production after allowing for subsequent price rises. Most devaluation in the UK has only worked in the short term. What you gain by devaluation is lost on the inflationary swing. Social Costs * The single currency alone will not make Europe prosperous. France and Germany are inflexible; both have high indirect social taxes, which threaten growth, such as the working time directive. * Higher payroll taxes are inevitable to finance the irresponsible social policies of France and Germany. European factionalism may eventually destroy EMU. * Some of the UK's advantages - labour market flexibility and low wage costs - have been eroded by government adoption of the social chapter, working time directive, and the national minimum wage. ...read more.


The monetary authority is obliged to supply the currency at the fixed exchange rate, which results in an increase in the money supply. Given a particular shift in the IS curve, the LM curve will shift to intersect the new IS curve at world interest rates. Under fixed exchange rates the money supply is effectively endogenous. 3. Suppose that the European Central Bank decides to tighten its monetary policy. This implies that the European interest rate has increased. a) How would this affect output and the exchange rate in those countries not joining the monetary union (Denmark, Greece, Sweden and the UK)? Their interest rates will below that in the monetary union. Demand for their currencies will fall, leading to a depreciation of their respective currencies (assuming they do not fix their respective exchange rates against the euro). Net exports increase and this leads to higher levels of output in the non-member countries. b) What could the authorities in the non-member countries do to stabilise output? Given that their exchange rates are floating against the euro, only monetary policy has any effect (again assuming PCM). If they wanted to stabilise output (perhaps it was already at potential output) they would have to also reduce their money supplies. c) How would your answers to a) and b) change if the non-member countries had fixed their currencies to the Euro? As in the ERM... a) Demand for their currencies would fall (and supply increase), as investors move their wealth into Euro bonds. The non-member central banks would then be obliged to buy the relevant domestic currency at the agreed exchange rate. Taking this currency out of the market means that the domestic LM curve has shifted to the left (recall LM curves are endogenous under fixed exchange rates). Output will therefore fall. b)Under fixed exchange rates they might use expansionary fiscal effects which would shift the IS curve to the right. ?? ?? ?? ?? Coursework Essay Introductory Macroeconomics Page 1 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. The Nature of Macroeconomics

    Knowledge of components needed to understand economic activity and formulating a stabilising policy o Changes in AD give clues to sources of economic instability o Aim of government is to stabilise economy o Recession --> expansionary policies to stimulate components AD � --> UEv o Boom --> contractionary polices dampen

  2. Retailing In India - A Government Policy Perspective

    For many of the fast moving consumer goods (FMCG), the gap between the company balance sheet figure and the street price figures is more than 35%, and one factor in this is the "open market" interest paid by the trade channels.

  1. The Japanese Occupation - Concept of Great East Asia Co-Prosperity Sphere

    which the urban populations had become accustomed The Japanese paid for all their transactions but they did so by issuing currency not backed by gold which in effect made it worthless. The circulation of Japanese currency caused a devaluation of the various Southeast Asian currencies which gradually developed into an inflation when the Japanese increased the circulation of their currency.

  2. Derive the LM curve under the theory of liquidity preference. Does this depend ...

    This means that, at any level of income, a higher rate of interest is required to equilibriate the money market. This is depicted on the LM curve, by an upward shift. b. An increase in the money supply The money supply is the other exogenous variable in the theory of liquidity preference.

  1. Living Wage

    When investing in developing countries, world-class manufacturers tend to locate their factories in the areas that have the most advanced infrastructure and workers' skills rather than in the areas that offer merely the lowest wages5. The answer to the question on how long the advantage of low wages will last

  2. Recession, Tax Cuts and Budget Deficits.

    of a recession; current employment, current industrial production, real manufacturing and trade sales, and current real personal income less transfers. The start of the 2001 recession was marked by a slight decline in the current employment and a large decrease in industrial production compared to previous recessions.

  1. A Comparative Discussion of Different Approaches to Entrepreneurship.

    Achievement, power and affiliation are considered as three main points in his works, Socially Acquired Needs (McClelland, 1961). Another representation is Decisional Balance, put forward by Janis, Irving and Mann in 1977. It analyses entrepreneurial psychology as four stages: utilitarian and loses for self; utilitarian and loses for significant others; self-approval or disapproval; social approval or disapproval (Janis, 1977).

  2. Exchange rate.

    in that case, the competitiveness of British exporters would be improved and the balance of trade goes mature. The capital transaction between a country and the international world will also affect the foreign exchange value of a country's currency. As speculators for example, they work in the foreign exchange markets

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work