International Economics

Assessment 2

Europe

Samantha Cochrane

In joining the European Union, the United Kingdom has been affected in many different ways. We have had the advantages and the disadvantages, the benefits and the costs.

Advantages to the EU cover many fields; there is greater specialisation and economies of scale, for example the more efficient a firm is in producing their product then the bigger the scale of production leading to higher capital for them and also leading to lower costs.

There would be more competition involved as the removal of trade barriers leads to more countries being involved leading to greater ideas and more innovation.

Trade between member states becomes quicker and cheaper as the EU is a customs union – a single market.

No tax tariffs will be imposed due to this and so this is another benefit of being part of the EU. This leads to cheaper prices for the consumers of all the imported products.

Consumers will also benefit from food heath and safety standards as all goods that are produced in the European Union must now carry, “Best Before” dates, price indicators and a list of ingredients, colourings and additives that they contain. British consumers need not worry about eating imported foreign foods from the EU as they all have pretty much the same standards.

Problems arise with the unemployment levels, as there are more businesses in every trade the less efficient firms tend to close down leaving the people who were employed in them unemployed.

The admin costs are likely to be high as running a trade bloc incurs high costs and it can be quite slow as it takes time to respond to changing economic and political events.

Combining common economic policies may be beneficial for the EU as a whole but could be damaging for UK firms in certain situations. A decline in customer’s demands would normally mean that the UK government would cut interest rates to encourage customers to keep spending. However the EU economic policy may dictate that interest rates are kept relatively high to combat rising inflation.

One question that has also been raised is that does the UK need to be a part of the EU, or does the EU need the UK?

Mr. Blair believes that the jobs currently resulting from trade with the EU would be lost if we left. However, a number of studies have found that if the UK were to leave the EU then it would have little impact on jobs, including a report by the National Institute for Economic and Social Research.

Pain, N and Young, G., Continent Cut Off? The Macroeconomic Impact of British Withdrawal from the EU, NIESR, February 2000. Republished as, “The macroeconomic impact of UK Withdrawal from the EU”, Economic Modelling, 21 (2004), pp. 387-408. They concluded that there was, “no reason to suppose that unemployment would rise significantly if the UK were to withdraw from the EU”. However, they argued that foreign investment would fall, leading to a reduction in GDP of 2.25 per cent.

www.civitas.org

One of the main issues surrounding us at the moment is the decision whether or not to join the euro, ...

This is a preview of the whole essay

www.civitas.org

One of the main issues surrounding us at the moment is the decision whether or not to join the euro, to change to this new currency and use one currency throughout the whole of Europe. The euro was created on the 1st of January 1999 and by the time that the notes and coins were issued in January 2002 12 of the 15 EU states was members, the UK was not one of them.

This issue has approached us with many different views and opinions, many arguments both for and against it and to try and approach it with an economically sound mind. In 1997 the Chancellor set out 5 tests which would determine whether or not it would be in the UK’s economic interest to join the single currency and adopt the euro.

These tests were to see if:

Convergence – it states that to be passed, the UK economy must have:

Converged with Europe

Be shown to have converged

This basically means that there has to be sustainable convergence between Britain and the countries of the single currency.

Flexibility – there must be sufficient flexibility to cope with economic change, the economy must have the ability to adjust to this change.

Investment – to be successful this single currency must create and attractive area where there is low inflation and stability and it must be a complement to the Single Market – boosting competition and providing new opportunities.

Financial Services – this test centres on whether entering the euro would be advantageous for the sector and whether our services are ready for a single currency.

Employment and Growth – whether it is good for employment. The Treasury states that this is the fundamental test.

There are however three options available to us;

To join the single currency, which will mean abandoning the pound and using only the Euro
To stay out of monetary union altogether and keep the pound
To use both the pound and the Euro, with the two linked by an exchange rate mechanism set by the UK government.

With the third option, the UK will be able to keep the pound as a symbol of national identity and maintain a degree of control over the national economy, while having the advantages of also using the Euro.

It is common knowledge that the pound is stronger than the euro, this comes from the UK outperforming other competitive countries and substantially becoming more competitive.

Interest rates were also higher in the UK and so more money flowed into the UK economy.

However the government were able to use certain polices to get into this possible economic situation and the Bank of England was able to adjust interest rates in order to control inflation. Nevertheless if the UK chooses to join the Euro then both exchange rate policy and many other polices and interest rates will be in control of the European Bank and I feel that this could lead to certain problems arising.

For example, there are many different countries in the EU and each country has its own economy, thus, there are many different economies within the EU. At any time one economy may be booming whilst another may not e.g. Germany may be in a boom while France is in a recession, however within France there may be areas if boom and areas of recession, for example Paris may be in a boom while St Etienne may be in a recession leading to rich and poor regions.

If that was to happen to the UK and we were left in a bad recession and we had handed over the power of interest rates and certain polices to the European central bank in Brussels then we lose a lot of the power over our decision making and if we were the only country to be suffering from a bad recession then the chances are the central bank wouldn’t take any action until the problem has spread to other countries and became big enough for them to get involved. That would be a big security issue that would be avoided if we were to keep the pound and not take on the Euro. Therefore it is damaging to our economy and only through a stable economy will the euro have the chance of becoming a stable currency.

This exchange of power from our government to the European Central Government could be seen as another disadvantage to joining the Euro. Some skeptics believe that upon losing the pound there will be a significant loss of national identity. To an extent this could be very true, having a foreign central government deciding upon the polices of our economy does dull out our identity as we are not able to decide upon the future of our own economy.

What’s more is that polices are more likely to be decided by the economic values of the lager places in the UK such as London for example, this means that other areas in the UK must simply accept these polices that have been decided using figures from the flourishing economic areas. This could cause problems as people in less flourishing, poorer areas will want to up and leave these areas to move to the bigger, better off places causing more competition for jobs in these areas which will in effect lead to high unemployment figures.

Another major factor would be that the EU would dictate the amount of government spending each country can do, is that really what we want to live under, having a budget so tight it will make things difficult?

There would be high transition costs of joining the euro. The whole of the UK would have to be re-educated into using the euro, changing all the labels on goods and in stores, training of staff in every business, changing computer software and adjusting tills. This is not just costly but also time consuming and although it may provide short term jobs it will also mean that the day to day running of the UK will struggle when these changes were going into action.

There are many different ways to look at the effects of joining the Euro and they are not all negative, in fact one big advantage for the UK if it were to join would be that there would be easier trade, in fact it may even increase the trade as it would be a united union sharing the same polices, working on a single currency with the EU. Time and money would be saved as there would be no conversion when trading, this to may encourage many people to go on holiday as they don’t have to worry about the rate of change they are getting, and if it encourages tourists out of Briton then surely it will encourage them into Briton too boosting the tourism industry and generating more revenue for the UK.

By joining the euro it will free up some government time as they will not have to worry about setting interest rate controlling policies as the EU will set a general rate that all members have to follow, this allows the UK government to concentrate on any other problems such as unemployment and will allow more money for investment into solving these problems.

Firms would reap the benefits as they would incur lower production costs as there would be the elimination of transaction costs, thus they would produce more and therefore make more revenue.

The UK would have the same benefits as all other countries that are members of the EU, there would be less barriers to trade in place and as competition is likely to increase firms would have to reduce their costs in order to keep their customers, beneficial for the customers but not the firms.

As lower inflation rates are common within the EU the Bank of England may decrease the interest rates on short term loans in order to generate investment which in turn would make it cheaper for firms to take out loans. This way firms would benefit financially if they were planning to take out loans to increase their firms and homeowners would benefit from cheaper mortgages.

Multi national companies may be more willing to invest in building firms in the UK as before they have been wary due to the fact that the value of services and goods they provide may decrease due to the fluctuation rates between the pound and the euro, if the UK was part of the euro then these problems would vanish and therefore the UK may benefit from more jobs and more business.

The removal of the two currency’s may encourage more investment as the investors would no longer have the traditional worry about moving their money into a currency other than their own as the currency would be exactly the same.

Overall there would be a more efficient and streamlined business across the euro zones.