The European Union.

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Introduction

At present the European Union is made up of 15 countries. This includes the UK, Rep. Pf Ireland, France, Germany, Denmark, Portugal, Spain, Sweden, Greece, Austria, Italy, Finland, Belgium, Luxembourg, and the Netherlands. All of these countries Except us, Sweden and Denmark belong to a single currency, the Euro. All these countries share the currency the euro, and it is thought to only be a matter of time until us, Britain, Sweden and Denmark join the Euro. The main debate in Britain at the moment is ‘Should Britain join the Euro?’

  I am going to discuss the arguments for and against Britain joining the single currency. Currently Tony Blair had stated that in order for Britain to join the Euro it must pass 5 economic tests that will say whether Britain’s economy is ready to be controlled by the European central bank. The 5 tests include:-

  Test 1- Convergence

  Test 2- Flexibility

  Test 3- Investment

  Test 4- Financial services

  Test 5- Growth, Stability and Jobs

At present Britain has not passed all of these tests but it is said to only be a matter of time until Britain does decide to join.

The 5 Economic Tests

1. Convergence

This test asks the question, “Are our business cycles and economic structures compatible so that we and others could live comfortable with the Euro interest rates on a sustainable basis?”

  Joining the Euro will mean that Britain will loose its current independence of monetary policy and will not have the independence to set its own interest rates. Currently the Bank of England sets our interest rates and our sufficient to meet our economies needs. If we   where to join the euro, the European Central Bank would decide on interest rates tom meet the whole European economy and would not be specific to us. This could be problem if one countries business cycle is significantly out of step with that of other member countries. For example if one countries in a point of recession at the time when the European Central Bank is raising interest rates then this would be disastrous for that country.  Normally if a country were in a point of recession the country would normally lower interest rates to increase aggregate demand. This means that we need to judge whether our UK’s economy is similar to that of the rest of the EU.

2. Flexibility

This asks the question “If problems emerge, is there sufficient flexibility to deal with them?” This looks at how flexible the economy would be if Britain to get back to if it fell out of line. The test examines how changes in wages, prices and employment can help the UK and the Euro zone deal with the economic shocks. Flexibility is hard to measure and there is no simple indicator to say whether the UK’s economy is flexible enough to with situations if they were to occur. One problem here for the UK is that inflation rates would become variable if we were to join the Euro.

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3. Investment

This asks “ Would joining the EU create better conditions for firms making ling term decisions to invest in Britain?” There are two aspects to this. One is, will UK firms find membership of the Euro conducive to investment and secondly, will foreign firms be prepared to still invest in the UK. If these firms will invest in the UK, it will depend on the ability of the UK to meet the convergence and flexibility tests. If expectations are high for the UK, then firms will be more likely to invest in the UK which will obviously ...

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