UK Membership of the European Monetary Union.

Authors Avatar

Coursework Essay Introductory Macroeconomics

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:

  • 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.

  • 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.

  • 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.

  • Political Influence

The UK stands to lose political and economic influence in shaping future economic integration if it remains outside the monetary system.

  • Greater security and certainty

Since participating countries have been required to follow disciplined economic such as limits on national debt and the achievement of inflation and interest rates within an acceptable range. The conditions exist to ensure the best chance of maintaining stability and long-term growth across the entire euro-zone. This will benefit all of the participating countries since a more prosperous and affluent region will result in larger potential markets for all.

  • Efficiency Gains: the case FOR
  • Dynamic gains will be made from capital investment in tooling up for the larger market. This market widening and deepening will improve growth.
  • Gerrymandering by politicians will be unlikely. Minus balances have led to interest rate rises to maintain the exchange rate.
  • The euro allows each member to draw an exchange rate provided by the collectiveness. Growth can proceed without resorting to stop-go.
  • Joining the euro could benefit the UK, particularly with its history of stop-go economics, balance of payments problems, and sterling crises.
  • In a single capital market, much more so than in a national market, 'securitisation' will take off, with companies borrowing by issuing bonds rather than by taking out bank loans. Unified, liquid capital markets will be attractive to investors outside the euro zone. The shift to euro-dominated securities will reduce the cost of capital for euro firms. As a new world currency, the euro would make securitisation more competitive within its area than for the pound sterling in the UK acting outside and alone.

3. Arguments Against UK membership:

Critics of the Euro argue that the new currency does not meet the requirements of an optimal currency area and that structural economic differences between countries will undermine the success of the project.

Other economists believe that the UK can continue to prosper as an economy outside the Euro Zone whilst still deriving some of the benefits from participation in the single European market.

  • Risk of deflation and higher unemployment

Currency unions have collapsed in the past. There is no guarantee that EMU will be a success. It may prove to be a recipe for economic stagnation and high unemployment if a deflationary monetary policy for Europe is pursued, to keep inflation within the 2% limit.

Join now!

  • Euro not an optimal currency zone

Within Euro-Zone countries there is geographical immobility of labour and there is insufficient wage flexibility inside European labour markets to cope with external economic shocks

Member economies have not converged fully in a real or structural sense. Although there has been a substantial amount of nominal economic convergence during the run up to the establishment of the Euro, there are still huge differences in the economic performance of member nations. And, at some stage in the future, there is a risk that excessively high interest rates will be set across the Euro ...

This is a preview of the whole essay