Would the Euro benefit UK businesses?
Would the Euro benefit UK businesses?
By Martin Yau
Contents
Introduction 1
Sources 1
Exchange Rates 1
European Single Market 2
The Euro (€) 3
Case Study: BMW Group 5
The Public Vote 7
The Verdict 11
Bibliography 13
Books 13
Websites 13
Would the euro benefit UK businesses?
Introduction
On 1st January 1999 12 members of the European Union adopted the euro. Members are; Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland and Greece. The transition period began until 31st December 2001. National banknotes were withdrawn by the end of February.
The introduction of the euro had impact on businesses in the euro zone. Would UK businesses benefit? I will find out about this by doing research, logging onto websites, sending emails to some companies, surveying companies, looking in economic magazines, textbooks and newspaper articles, which are relevant to this topic. I will find out about the euro first, possible impacts on UK businesses.
Sources
Exchange Rates
The exchange rate is an international market for buying and selling currencies at a price at which its own currency exchanges for that of others, e.g. £1 = €1.7. There are two ways the exchange rate may influence business activities:
Price of goods and/or services which businesses:
* Buy in international markets.
* Sell in international markets.
Changes in the exchange rate may create uncertainty in both circumstances:
* It makes cost and pricing difficult.
* Profit surplus or less earned than the business planned.
There is a possibility of making a profit, but there are risks. If businesses sell goods on credit, for example three months, they sacrifice their funds and take risks:
* Possibility of non-payment.
* If the payment is made in a foreign currency, the value of the currency may decrease below the original value, due to poor exchange rates.
If the value of one currency increases/decreases against another, the price increases/decreases, making goods more expensive/cheaper to foreign businesses. If the exchange rate of the euro decreases/increases, the supply curve would expand/contract to the right/left on the demand curve, causing the demand for the pound to increase/decrease.
European Single Market
The Single Market allows all EU countries to trade equally, without gaining unfair advantages, e.g. children working in factories mean lower production costs, due to lower wages.
The main values of the Single Market are free movement of:
* Goods - member states cannot introduce new or improve existing customs duties, impose quotas on other EU member's goods and introduce trading regulations that discriminate other members.
* Capital
* Labour - only within EU area. Non-national workers are entitled to the same tax as national workers.
The macroeconomic benefits to the EU are:
* GDP - 1.5% increase.
* 1% increase in internal investment.
* 900,000 jobs created.
* 1% reduction of average price inflation.
The ...
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The main values of the Single Market are free movement of:
* Goods - member states cannot introduce new or improve existing customs duties, impose quotas on other EU member's goods and introduce trading regulations that discriminate other members.
* Capital
* Labour - only within EU area. Non-national workers are entitled to the same tax as national workers.
The macroeconomic benefits to the EU are:
* GDP - 1.5% increase.
* 1% increase in internal investment.
* 900,000 jobs created.
* 1% reduction of average price inflation.
The advantages are:
* Better communication between the market and manufacturer, so improved capital movement and transport costs are lower.
* Better market information means that firms can decide on which strategy they want to take and can adapt quickly to changes, encouraging innovation and new technologies to gain long-term advantage.
* Demand increase, due to foreign investment, causing new competition.
* Better identity abroad means more consumers.
* Improved access to EU market to non-EU members, encouraging trade.
The disadvantages are:
* Increased competition causes firms having smaller market share, means profits decreased, due to prices lowered for consumer demand to stay high.
* Business closure rate will increase for firms, which are least efficient.
* Smaller firms will be more prone to company take-overs.
The Euro (€)
* Key objective is stability.
Growth rates of GDP in volume
(based on seasonally adjusted data)
Percentage change compared to the previous quarter
Percentage change compared to the same quarter of the previous year
2001
2002
2001
2002
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Euro-zone
0.2
-0.3
0.4
0.4
.4
0.4
0.3
0.7
EU15
0.2
-0.2
0.3
0.4
.4
0.6
0.4
0.8
Source 1 Eurostat
The impacts so far in the euro zone are GDP increased by 0.8% in the first half of 2002, up by 1% last year, compared to 0.7% in EU, up by 1.2% last year.
Up to July 2002, volume of trade in the euro zone increased by 4.7%, compared to 10.7% in EU. This enforces the idea that trade in the euro zone did not do as well as the rest of the EU.
Volume of retail trade in the euro-zone, the EU15 and the Member States
% change compared with the same month of the previous year1, 4
Feb-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02
Euro-zone
.5
.4
0.6
0.6
-0.8
.4
EU15
2.3
2.1
2.0
.6
0.4
2.3
United Kingdom
5.8
4.9
7.5
4.8
4.9
5.3
: Not available
Source 2 Eurostat
Unemployment rate in the euro zone is 8.3%, compared to 7.7% (rest of EU). This illustrates that unemployment in the euro zone is slightly worse than the rest of the EU.
Unemployment rates (%) in July and August 2002 in ascending order
August
July
August
July
EU15
7.7
7.7
Portugal
4.6
4.5
Euro-zone
8.3
8.3
Sweden
4.8
4.9
Belgium
6.9
6.9
Luxembourg
2.5
2.4
Germany
8.3
8.3
Netherlands
:
2.8
France
8.9
8.9
Austria
4.2
4.2
Italy
:
9.0
Denmark
4.3
4.3
Finland
9.4
9.3
Ireland
4.5
4.5
Spain
1.3
1.3
Source 3 Eurostat
Advantages are:
* Companies plan ahead, due to stable value of the euro.
* Money is saved on transaction.
* Low inflation.
* Low interest rates, means growth.
* Protection against costs, e.g. large exchange rates, which slows economic growth and distort trade flows.
* No costs, higher than original cost, to compensate exchange rate uncertainty and high dividends to share holders.
Disadvantages are:
* Countries economic policies controlled (no freedom to adopt different policies).
* Unpredictable consequences, if inflation rate increases rapidly, e.g. Greece - 200% increase on some goods. Consumers were furious.
Case Study: BMW Group
BMW Group produces automobiles. The firm is made up of BMW, Rolls Royce and Mini.
Source 4 BMW Interim Report to 30 September 2002
Turnover has increased to €32,338 million (2002) from €28,477 (2001), up by 14%. Cost of sales went up by €3141 million (15% increase), from €21,232 million (2001) to €24,373 million (2002). Gross profit has increased from €7,245 million (2001) to €7,965 million (2002), increased by 10%. Overhead costs have increased from €4,729 million (2001) to €5,228 million (2002), 11% increase (up by €499 million). Net profits (before tax) have gone up by € 189 million (7% increase), from €2,531 million in 2001 to €2,720 million in 2002. Net profits (after tax) have increased by €135 million (5% increase), from €1,559 million (2001) to €1,694 million (2002). This enforces the idea that BMW Group has performed well since the introduction of the euro because of increased sales, meaning that countries in the euro zone save money on transaction and production per unit costs has decreased.
Source 5 BMW Interim Report to 30 September 2002
Dividends has increased by €40 million (13% increase), from €310 million (2001) to €350 million (2002). This shows that the euro has benefited BMW Group shareholders as well as businesses because they had a greater rate of return this year. Retained profit has increased from €1,249 (2001) to €1,344 million (2002), 8% increase (up by €95 million). This means the euro can help BMW Group to invest more money in the future to make the firm more efficient and develop new technologies and new products to keep ahead of its rivals.
2001
2002
Net profit (after tax)
€1,559
€1,694
Dividends
€310
€350
Retained profit
€1,249
€1,344
Note 1: All figures are in millions.
I have sent emails to companies to find out how did they perform since the introduction of the euro, but I got no replies.
The Public Vote
I surveyed 20 people about the euro and its possible impacts after the introduction of the euro.
55% of the public (11 people) claim the euro would benefit UK businesses. 45% (9 people) believe it would not.
Answering yes, most people (46%) believe there is trade would increase as their most important reason. Least people (9%) claims that firms would plan ahead easier.
Answering no, most (34%) claim that businesses will make losses due to increased price and competition. Only 11% claims that the euro would increase unemployment rates.
55% of the people think consumers would be better off. 45% believe consumers would not.
Answering yes, most (46%) believe price comparisons would be easier. Least (9%) believe more choices of products would be provided.
Answering no, most (56%) claims that price would increase. Least people believe (11%) the pound would be more competitive.
Overall, this shows that the euro would benefit consumers and businesses, increasing trade and profit, comparing Euro zone and UK prices would be easier and UK prices of the products would be similar to those in mainland Europe.
Euro Questionnaire Results
Frequency
Total
Consumer
Business
Euro would benefit UK businesses?
Yes
1
6
5
No
9
4
5
Reason for Yes
Money saved on Transaction
2
Trade increase
5
3
2
Firms plan ahead easier
0
Profit increase
3
2
Reason For No
Businesses making losses due to increase in price and competition
3
2
Breaks Tradition
0
Increase in unemployment rate
0
UK economy will become unstable
2
0
2
Confusion
2
0
2
Consumers would be better off when the euro is introduced in the UK?
Yes
1
6
5
No
9
4
5
Reason for Yes
Money saved on transaction
2
2
0
More choices
2
2
0
Easier price comparison
5
2
3
Less confusion
0
Mortgage rates will not increase above 4%
0
Reason For No
Economy will be controlled by EU
2
2
0
Public will not like change
0
Pound is more competitive
0
Price increase
5
0
5
Total Number of people surveyed
20
0
0
The Verdict
Based on the information I have got, the advantages outweigh the disadvantages. If the euro is introduced in the UK, it would partly contribute inflation rate increase and consumers would get confused during the transition period for a short term, e.g. changing state of economy. In the long term, there would be greater benefits, including lower production costs by locating factories to areas, which labour and capital costs are lower.
There is one problem, if EU countries in the Euro zone do not co-operate well, economies are not in line with each other or war breaks out, the euro would simply disintegrate and Euro zone countries would use their original currencies before the introduction of the euro.
Bibliography
Books
* Economic Review - Volume 17 Issue 3 February 2000 -Phillip Allan Updates - 'One side of the coin' by James Forder.
* EU Law - Texts, cases and materials - Third Edition by Paul Craig and Gráinne de Búrca - Oxford - ' Understanding EMU: The Economic Foundations'
* Nuffield Economics & Business - Student's Book - Longman
* Heinemann Business Studies for AS Level by David Browne, Mick Baross, Wendy Davies, Rob Dransfield and Dave Needham
* European Business - Forth Edition by Simon Mercado, Richard Welford and Kate Prescott - FT - Prentice Hall - 'The impact of SEM'
Websites
* www.europa.eu.net
* www.euro.gov.uk
* www.becentral.co.uk
Nuffield Economics and Business- AS Level Coursework- Unit 1
Title Would the euro benefit UK businesses?
Name Martin Yau
Exam No. 6079
Centre No 58231.
Nuffield Economics and Business- AS Level Coursework- Unit 1
Title Would the euro benefit UK businesses?
Name Martin Yau
Exam No. 6079
Centre No 58231.
