Entry criteria to the Euro
.Entry criteria
The four entry criteria are set out in Article 121(1) of the EC Treaty.
A Member State must satisfy all four criteria in order to be able to enter the euro area.
(Treaty quotes Source: http://europa.eu.int/scadplus/leg/en/lvb/l25014.htm [02/02/2004])
.1. Price Stability
The Treaty stipulates: "The achievement of a high degree of price stability [...] will be apparent from a rate of inflation which is close to that of, at most, the three best-performing Member States in terms of price stability."
The inflation rate of a Member State must not exceed by more than 1.5% that of the three best-performing Member States in terms of price stability for a year preceding the test for criteria compliance.
TRENDS
INCREASING
NO CHANGE
DECREASING
Country
JUN 03
JUN 02
JUL 03 JUL 02
AUG 03
AUG 02
SEPT 03
SEPT 02
OCT 03
OCT 02
NOV 03
NOV 02
DEC 03
DEC 02
Belgium
.5
.4
.6
.7
.4
.8
.7
Germany
0.9
0.8
.1
.1
.1
.3
.1
Greece
3.6
3.5
3.3
3.3
n/a
n/a
3.1
Spain
2.8
2.9
3.1
3.0
2.7
2.9
2.7
France
.9
.9
2.0
2.3
2.3
2.5
2.4p
Ireland
3.8
3.9
3.9
3.8
3.3
3.3
2.9
Italy
2.9
2.9
2.7
3.0
2.8
2.8
2.5p
Luxembourg
2.0
.9
2.3
2.7
.8
2.0
2.4
Netherlands
2.2p
2.1
2.2
2.0
.9
2.0
.6p
Austria
.0
.0
.0
.4
.1
.3
.3
Portugal
3.4
2.9
2.9
3.2
2.8
2.3
2.3
Finland
.2
.0
.2
.2
0.9
.2
.2
Euro-Zone
2.0
.9
2.1
2.2
2.0p
2.2p
2.0p
Denmark
2.0
.8
.5
.7
.1
.4
.2
Sweden
2.0
2.4
2.2
2.3
2.0
2.0
.8
UK
.1
.3
.4
.4
.4
.3
.3
EU15
.8
.8
2.0
2.0
.9p
2.0p
.8p
Iceland
.3
0.9
.0
.2
.1
.5
.8
Norway
.5
.2
2.0
.5
.3
.0
0.1
(Source: http://www.ibeurope.com/Database/Resources/R010inf.htm [02/02/2004])
TEST PASSED
.2. Government Finances
The Treaty stipulates: "The sustainability of the government financial position [...] will be apparent from having achieved a government budgetary position without a deficit that is excessive [...]".
This stipulation gave rise to two criteria being drawn up by the Commission for the Council of Finance Ministers.
A. The annual government deficit must not exceed 3% of gross domestic product (GDP) at the end of the preceding financial year to the test for criteria compliance.
B. Outstanding government debt must not exceed 60% of GDP at the end of the preceding financial year to the test for criteria compliance.
(Source: http://www.statistics.gov.uk/cci/nugget.asp?id=277 [02/02/2004])
TEST PASSED
.3. Exchange Rates
The Treaty stipulates: "the observance of the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System, for at least two years, without devaluing against the currency of any other Member State."
A. The Member State must have controlled its exchange rate in line with the Euro within the normal margins of the exchange-rate mechanism, without any break during the two years preceding the test for criteria compliance.
B. The Member State must not have devalued its currency against the Euro on its own initiative during the same period.
The pound has been controlled in line with the normal margins of the ERM and there has been no devaluation in the last two years.
TEST PASSED
.4. Long-Term Interest Rates
The Treaty stipulates: "the durability of convergence achieved by the Member State [...] being reflected in the long-term interest-rate levels".
The nominal long-term interest rate must not exceed 2%of the three best-performing Member States in terms of price stability. The period taken into consideration is the year preceding the test for criteria compliance.
(Source: http://www.co-operativebank.co.uk/treasury_graphs/treasury_long_term.html [02/02/04])
(
TEST PASSED
2.The five economic tests
* Convergence - Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?
* Flexibility - If problems emerge is there sufficient flexibility to deal with them?
* Investment - Would joining EMU create better ...
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The nominal long-term interest rate must not exceed 2%of the three best-performing Member States in terms of price stability. The period taken into consideration is the year preceding the test for criteria compliance.
(Source: http://www.co-operativebank.co.uk/treasury_graphs/treasury_long_term.html [02/02/04])
(
TEST PASSED
2.The five economic tests
* Convergence - Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?
* Flexibility - If problems emerge is there sufficient flexibility to deal with them?
* Investment - Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?
* Financial services - What impact would entry into EMU have on the competitive position of the UK's financial services industry, particularly the City's wholesale markets?
* Growth, stability and employment - In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?
(Source: http://assessment.treasury.gov.uk/page_01.html 04/02/2004)
2.1 Convergence
Since 1997 there has been a definite trend towards convergence, which reflects the UK economy's greater stability.
Indeed, the UK now has greater cyclical convergence than some Eurozone members in the run-up to the start of EMU in 1999 and remains so today.
The UK meets the EC Treaty convergence criteria as shown above. But there remain differences with the euro area, such as housing . Because of these differences there are risks along with any dynamic changes that would take time to come through, that mean we cannot yet be certain that UK business cycles are sufficiently compatible with those of the euro area to guarantee that the UK will find Eurozone interest rate compatible with its economy permanently
It is felt by the Government that at this time (9th June 2003), despite the extent of convergence with the Eurozone has significantly increased, the convergence test is not met
The Government is developing a policy agenda to deliver high levels of output and employment, which shows a commitment to building on the platform of stability, this will help to make the economy more convergent with the euro area for the future.
TEST FAILED
2.2Flexibility
The British labour market has improved its flexibility markedly since 1997. Unemployment has fallen significantly to one of the lowest levels in the Organisation for Economic Co-operation and Development (30 countries including EU member and USA)
Considerable progress has been made to reform labour, product and capital markets in the UK and the Eurozone, however there is still a long way to go before UK economy is able to deal with the risks identified in the convergence test.
Inflation volatility is very likely to increase inside Eurozone. Greater flexibility in the UK and throughout the Eurozone would minimise output and employment instability, helping to ensure convergence was durable.
It is important that progress maintained on a range of economic reform policies to increase flexibility and resilience, particularly in labour markets.
Overall, at the present time, we cannot be confident that UK flexibility, while improved, is sufficient.
TEST FAILED
2.3 Investment
Long-term under-investment has been held back UK productivity. EMU entry could reduce the cost of capital for UK firms if long-term interest rates fell further inside the euro area and if membership of a larger financial market reduced the cost of finance.
These costs could fall for small and medium-sized enterprises (SMEs) in particular if joining EMU lowers the barriers which prevent SMEs accessing Eurozone financial markets and lowers the cost of bank lending.
Over time, EMU is likely to boost cross-border investment flows and foreign direct investment (FDI) in the Eurozone. There has been a fall in the UK's share of total EU FDI flows coinciding with the start of EMU, and a corresponding increase in the share of the Eurozone.
There is a risk that the longer membership of the euro is delayed, the longer the potential gains in terms of increased inward investment are postponed. If sustainable and durable convergence is achieved, then we can be confident that the quantity and quality of investment would increase ensuring that the investment test was met.
TEST PASSED
2.4 Financial services
Over the four years since the start of EMU, the UK has attracted a significant level of wholesale financial services business. The strength of the City in international wholesale financial services activity should mean that it continues to do so, whether inside or outside EMU.
EMU entry should enhance the already strong competitive position of the UK's wholesale financial services sector by offering some additional benefits. Again, while the UK's retail financial services sector should remain competitive either inside or outside the Eurozone, entry would offer greater potential to compete and capture the effects of greater EU integration that would arise from the single currency and other efforts to complete the Single Market, in particular the Financial Services Action Plan (FSAP)
TEST PASSED
2.5 Growth, stability and employment
EMU membership could significantly raise UK output and lead to a lasting increase in jobs in the long term.
As noted above, the assessment shows that intra-euro area trade has increased strongly in recent years as a result of EMU, perhaps by as much as 3%to 20%; that the UK could enjoy a significant boost to trade with the euro area of up to 50 % over 30 yrs; and that UK national income could rise over a 30yr period by between 5%- 9%. A 9% increase in national income would translate into a boost to potential output of around 0.25%/yr, sustained over a 30-year period.
The failure in the convergence test means that, for the UK, macroeconomic stability would be harder to maintain inside EMU than outside at the present time.
The price stability objective of the European Central Bank (ECB) and the constraints on the use of fiscal policy for stabilisation under the Stability and Growth Pact (SGP) increase the chances that output and employment would be less stable inside EMU.
The EU macroeconomic framework is evolving in the right direction. Enhancing the flexibility and dynamism of the European economy will also be important if the full benefits of EMU are to be realised.
To enter the EMU on the basis of the convergence test is essential so that the UK can benefit from the increases in Eurozone trade, investment, competition and productivity.
Lower prices would lead to a lower cost of living, a key potential benefit of EMU entry for households. Poorer households tend to spend a greater proportion of their income on goods and services, so lower prices could benefit such households relatively more than wealthier ones.
TEST FAILED
3.The Impact of Entry on UK Business
Advantages
EMU entry would mean British companies would not experience currency fluctuation, when dealing with the Eurozone. This would enable then to have far tight control on pricing of their goods or continuity of price for materials.
Currency transaction would be removed, increasing profitability.
Eurozone interest rates are lower than in Britain, entry would give access to cheaper funding. Cheaper funding would reduce costs to business and increase profits. Also lower interest rates would lead to increased consumer spending (Mortgage payments reduced = more disposable income)
By joining the Eurozone, the UK economy would help create a more efficient market for goods and services, which would raise the competitiveness of the UK economy.
As the Eurozone grows it is expected to increase the potential for the Euro as an international currency. This could lead to the Euro being used extensively in trade outside the Eurozone as an alternative to the Dollar, this would also be more likely if the Dollar continues to devalue in th eway that it has done recently.
In remaining out side of the EMU it is possible for some European companies to stop sourcing goods from UK companies, preferring to deal with companies within the Eurozone only
International companies wishing to invest in operations to supply Europe (such as Japanese Car Makers) have been holding off until the UK joins the EMU (this investment might be lost to another European country if Britain continues to opt-out)
By joining the EMU Britain will be able to participate in changes to the Stability and Growth Pact.
Disadvantages
In comparison to other EU countries Britain has a large export market out side of Europe, particularly to the US and commonwealth countries, joining the Euro would not be of use to these markets and could even become a disadvantage.
Interest rates will be set by the European Central Bank , this might lead to interest rates which are good for Germany or France but are not suitable for the UK Economy.
Britain will lose control on Monetary policy, which would have a big effect on our ability to independently control the UK economy.
Britain currently enjoys a 'special relationship' with the US, however EMU entry might spoil this relationship and it is difficult to quantify the effect that this might have.
It could be argued that EMU is merely the next step towards an integrated federal Europe. There is already talk of tax harmonisation to support the Euro. Eurozone countries have a higher rate of taxation than in Britain, any resultant rise in taxes would be devastating to British Business.
The Euro has yet to establish itself as a strong currency, in fact it is viewed on the international markets as very weak. This could lead to higher inflation, which is something that the UK has spent a lot of effort to avoid.
The views of UK Businesses
Research by Bibby Trade Finance [June 2003] shows that 58% of companies believe the UK should definitely join the euro, a 10% increase on this time last year. Of these, 22% feel that Britain should join immediately, while 36% prefer entry in a few years.
Nick Sheele, chief operating officer Ford Motor Company "We export more than 80% of the cars we make in England to Europe," Ford has made strategic assumptions that Britain would enter the single currency between 2004 and 2006 and that the longer the country remained outside the euro zone, the longer Ford would suffer a competitive disadvantage against European manufacturers.
Roger Putnam, chairman of Ford UK, said: "If you are a manufacturer and a major exporter, making a 3% margin, and the currency rate moves 4% to 5% every three months, how can you plan your business?"
Ford also added that further investment in the UK was at risk if Britain stayed out of the euro. (Ford is the single largest private investor in the UK) [Oct 2002].
Takeo Fukui, president of Honda Motor, has added his voice to calls from prominent overseas manufacturers for the UK to adopt the single European currency."It is no good for our business," Mr Fukui said, referring to the strength of the sterling against the euro. In an attempt to compensate for cost competitiveness issues that emerged due to sterling's strength, Honda will rely on imports of cheaper parts manufactured in Asia, Mr Fukui said. While this has helped offset the currency impact, Mr Fukui said it was "not sufficient compensation". There is also an effect on the network of British parts suppliers, which counted on sales to Honda's UK operation. [July 2003]
A Major online survey of more than 5,000 chartered accountants across the UK by the Institute of Chartered Accountants in England and Wales (ICAEW) has shown that many in the profession (49%) believe that the UK should adopt the euro, although the majority of these do not want to commit to a specific timetable. A further 31% recommend that the UK should adopt a "wait and see" policy and delay any "in principle" decision to join. The survey, which covered Institute members working in both business and practice, asked respondents for their professional opinion on:
* Their business's current exposure to the euro through their clients/customers
* The current impact on the UK economy of non-membership
* The current impact on their business of the UK's non-membership of the euro.
* What the Government's future policy towards membership should be.
Graham Ward, president of the Institute, commented "The exceptional level of response to our survey shows that chartered accountants see EMU as a major business issue. The majority view on whether the UK should adopt the euro ranges from favourable to agnostic, with relatively few opposed in principle. Overall, the UK's current exclusion from the euro zone appears to be having an impact on the performance of only a minority of members' own businesses." The results show that 89% of chartered accountants surveyed report that their business is in some way affected by EMU, either directly or through their supply chains. The survey also shows that members are fairly evenly split on whether or not the UK's current position outside the EMU is good for the economy (40% of all respondents say that non-membership is helping the economy, compared to 38 percent who say that non-membership is harming it).
European Business Page 1 of 7 Christian HOGG
HND Business 7 May 2007 99A0031270
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