Why is Britain hesitating about membership of EMU and what are the main issues?

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Jonathan Attwood                30 November 2003

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International Relations:

Why is Britain hesitating about membership of EMU and what are the main issues?

On Friday January 1st 1999, “European dreamers finally saw their cherished hope become reality at midnight when 11 countries signed away their sovereignty over monetary policy and the single currency was born”.  However, with the mass jubilation that followed the commencement of the final stage of Economic and Monetary Union within the European Union, there were still some sour notes amid the rhetoric.  One included the argument from France that Wim Duisenberg (president of the European Central Bank) should step down in favour of a French president; the other major argument was the claim by Jacques Santer, European Commission president at the time, that Britain’s membership of the single currency was inevitable.  So why, 4 years later, has this “inevitability” not come into fruition? In order to answer such a question, one must derive first the meaning of EMU.

Economic and Monetary Union has been a European ideal for many years.  The end of the Second World War heralded the start of a new European surge towards integration.  On the one hand, France, left in ruins by occupation from Germany, held a hereditary fear of any further European conflict.  As the dust settled, Charles de Gaul emerged as the leader of the Provisional Government of the French Republic.  De Gaul was determined to avoid the mistakes of Versailles, and to make sure that such a situation as that of 1939 could never come about again.  On the other hand, Germany, overstretched and then destroyed during the Second World War, held out its proverbial hand for Europe to take and lead it out of turmoil.  Germany was thus split into 4 provisional sections, each controlled by one of the victorious allied powers (Great Britain; France; USA and the USSR).  The UK, under Winston Churchill, was stunned by the shear magnitude of the war, and the fact that for the first time in centuries, British soil had been invaded by an enemy power – the notion of Britain as an Island fortress was undermined.  Thus, in the first three weeks of July in 1944 (as the war came to a close), delegates of 45 countries met to draw up an agreement to restructure Europe and create the foundations to a new “user friendly” world atmosphere.  What emerged was the Bretton Woods Agreement, which set up for the first time in history, almost universal institutions – the International Monetary Fund (IMF); the International Bank for Reconstruction and Development (IBRD); and the General Agreement on Tariffs and Trade (GATT).  The first act of the IBRD was to give France an initial loan of $250 million in 1947 (after De Gaul’s resignation) to help her rebuild her country.  The Bretton Woods Agreement set in motion a new European passion for integration, influenced by a general fear of European Warfare and a new idealistic approach to economics devised by the British economist John Maynard Keynes.  In 1952, France, Germany, Italy, Belgium, the Netherlands and Luxembourg; later to be confirmed in 1957 by the Treaty of Rome as the European Economic Community, created the European Coal and Steel community.  This aimed to set up a common market, by phasing out trade barriers and setting up an external tariff.  The treaty of Rome once again confirmed the new unprecedented European enthusiasm for further economic and social integration, as well as exposing the French determination to tie Germany further into agreements that would make war impossible.  At the Summit of The Hague in December 1969, heads of State and Government decided to make EMU an official goal of European Integration.  The Prime Minister of Luxembourg, Pierre Werner devised a plan whereby this could be achieved by 1980.  In 1969, the Werner Plan envisioned Economic and Monetary Union with three stages, including the permanent fixing of exchange rates; a single monetary authority to run monetary policy; unified capital markets; and the centralisation of fiscal policy at the community level.  The next step towards EMU came with the European Monetary System, devised by France (president Giscard d’Estaing) and Germany (Helmut Schmidt), which aimed to create a zone of monetary stability in Europe, organised around the central Exchange Rate Mechanism (ERM).  Finally, in 1992, after the Delors Report envisaged EMU in three stages, the Maastricht treaty was signed in Europe, creating a certifiable timetable for Economic and Monetary in Europe.  Thus, EMU is not a new phenomenon, but is the result of a vitalised Continental European passion for integration within the European Union, embodying the spirit and talent of idealistic politicians such as Lafontaine and Schumann as well as the fear exposed by Charles De Gaul.

Economic and Monetary Union in itself has many functions within the Eurozone area.  First off, the European Central Bank has been given full control of monetary policy within the region.  The ECB, under the guise of its President, Willem Duisenberg and the Governing Council (the highest decision-making body of the ECB, consisting of the President, vice president, the executive board and the 12 governors of the national central banks of the member states) sets a Monetary Policy Strategy which it implements by setting interest rates, thus regulating liquidity in National Central Banks; and by moderating the Monetary Aggregate (M3).  The ECB was set up on the 1st June 1998, and henceforth has claimed to be the guardian of Price Stability in Europe.  EMU also maintains a fixed exchange rate throughout the Eurozone area.  This means that each of the member states of the Eurozone cannot fluctuate their exchange rates to rectify balance of payments problems or maintain favourable environments for certain industries against foreign competition.  The issue of fixed exchange rates has always been a controversial one – especially in Britain – and is not a new thing.  From 1880-1914, many states in Europe (including Britain) were a part of the Gold Standard, whereby all currencies were tied to the value of Gold.  Winston Churchill (then the Chancellor of the Exchequer) took Britain back into the Gold Standard after the First World War, with dismal results.  Also, the Bretton Woods Agreement created a fixed Exchange Rate whereby currencies were limited to small fluctuations between each other.  The Snake in the Tunnel mechanism followed this in 1972, which limited EEC currency margins to 2.25%, promptly joined by the UK, Denmark and Ireland in a gesture of solidarity.  The next attempt, and arguably the most successful, was the Exchange Rate Mechanism, which became the basis for the fixed exchange rates of Economic and Monetary Union.  The third function of EMU is to create a single currency.  This currency (known as the Euro) was introduced to member states (Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland) on 1st January 1999, and national currencies were completely phased out by January 2002.  The new currency essentially performs the three classic functions of money – a medium of exchange, a store of value and a unit of account – but is much more than that.  The Euro is the most tangible symbol of a “European Identity” to date, and naturally it has a strong impact on Economic Developments throughout the area.  So, why has Britain been so hesitant about joining this new “European Identity” in EMU?

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First off, there is great emphasis on national pride in the United Kingdom.  Much of this is a result of the glamorous history that “Great” Britain as an island has enjoyed.  There has always been a notion that Britain was separate from Europe, a nation apart and above the trivial affairs of the continent.  There are many factors influencing this outmoded notion of “Britishness”.  First, the supremacy of the British navy was always a semblance of national pride.  Covering most of the waters of the world, Britain was known as the Workshop of the World because of her uncanny trading ...

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