"The issue of UK entry into the European Single Currency is fundamentally an issue of sovereignty". Discuss

“The issue of UK entry into the European Single Currency is fundamentally an issue of sovereignty”. Discuss

The issue of whether or not the UK should join the Euro, and the impact that this would have, is cause of interminable debate among politicians and economist. The outcome of this decision will affect the lives of all UK citizen and businessman.

Those who are against, UK joining the Euro, have argued that with the use of a single currency in Europe, the United Kingdom would totally lose its economic sovereignty. But behind this claim, which has some degree of true, there are some other reasons, which are at the very fundament of this matter. Above all there is the risk, which a fixed exchange rate system would signify for Great Britain.

The aim of this essay is to explain:

Why a fixed exchange rate system could have negative effects for the UK and therefore why this is the main reason for Euro-scepticism.
Why there is a degree of true, on the claim that joining the Euro would signify lost of sovereignty (more specifically lost of economic sovereignty).
If lost of sovereignty (if the UK does join the Euro), could be justified by the many advantages that the Euro has to offer.
Whether or not, in this era of Globalisation, the UK government has already lost its economic sovereignty.

Negative effect of a fixed exchange system:

If the United Kingdom will decide to take part to the Euro, it will also have to rejoin the EMR, as specified in the Maastricht Treaty and as underlined by Gerrasimos Thomas, the European Commission’s Economic Affair spokesman, “ if the British people decide to seek membership of the Euro, they will have to abide by the treaty criteria which include the joining of the EMR” (Sunday Telegraph, 11 February 2001).

This join of the EMR, in simple words, mean that Great Britain will have to take part to a fixed exchange rate system, which is a deja` vue. The UK did already once join the EMR during the 1990s, decision that the country had to pay at a very high cost (The guardian, 8 June 2002).

“Britain joined the EMR on 8 October 1990- fixing the level of the pound at DM 2.5,

but allowing a 6% band either side for the pound to fluctuate”. During the period in the EMR, unemployment in Britain doubled, 100,000 businesses were ...

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“Britain joined the EMR on 8 October 1990- fixing the level of the pound at DM 2.5,

but allowing a 6% band either side for the pound to fluctuate”. During the period in the EMR, unemployment in Britain doubled, 100,000 businesses were lost, and 1,7 million homes fell into negative equity. (http://www.no-euro.com/general/erm.pdf) this was due to the fact that Britain had to keep interest rate high to keep the level of the pound within the bands of the EMR. This negative period culminated with the terrible Black Wednesday, day in which the financial speculator emptied the Bank of England of Britain’s foreign currency reserves, causing like this a rise of interest rate to the 15%, which changed English policy for the following years (The guardian, 8 June 2002).

Analysing the above-mentioned fact, it is easy to understand that at the base of the issue, whether or not UK should join the Euro, is the fear that rejoining the EMR will have the same effect that it had in the 1990s.

Lost of economic sovereignty:

The term sovereignty “ refers to the claim by a state to be able to govern independently and the recognition of other states of its independence. It therefore concerns the ability of a state to be able to exercise control over a multitude of matters, such as economic policy and political affair”(class handout: explaining monetary union).

Many Politicians, above everyone else Mr Gordon Brown, look at the UK joining the Euro, as something that could be an irreparable mistake. The arguments which have been put forward, by those against the single currency, to convince public opinion are many, but the more relevant is the one concerning the inevitable lost of national control over monetary policy.

Joining the single currency, not only mean that English citizen will have to start to use a new kind of banknote, it also mean that monetary policy and more explicitly the setting of interest rates, will no longer be made by the Independent Bank of England. It will be the European Central Bank that will be in charge of setting a single monetary policy for all the European state members.

The effects that this would have are mainly two. The first is that a single monetary policy is likely to not best represent the interest of all those states that are participating to the monetary union. It is already hard for any government to set a domestic monetary policy that best represent the interest of all areas of the country and the economy. This is visible, simply watching at the contrasting effects that the rise of interest rate has in the different region of a certain countries, for example in England, high interest rate does reduce inflation in the south, but at the same time it does have a knock-on effect on the capability of manufacturing industry to be competitive in the north (class handout: explaining monetary union).

Second, but not less important, is that the UK government, without being able to fix the interest rate, will no longer of reducing the level of inflation in the economy, (high inflation also mean an high level of unemployment). In fact now, when there is high inflation, the government is able to rise the interest rate, which make saving more attractive than borrowing money, on the other side, by the same mechanism, when there is a necessity of more investment, the government can reduce the interest rate. But once in the Monetary Union, the UK government will only be able to sit aside and watch, without any power of effect its domestic economy.

Euro advantages:

So if all that has been mentioned above it is true, why should the UK join the Euro? The answer to this question can be found, on the advantages that the use of a single currency would bring to the UK and on the fact that in our days governments have already lost their economic sovereignty.

Joining the Euro would justify the lost control on monetary policy for many reasons. First of all we have to consider that, by taking part to the monetary union, will allow Great Britain to exercise influence on decisions of a monetary policy. There would be, also the advantage of the elimination of cost concerning the exchange of one currency to another, and there would be a price transparency, which would make easier comparison between product costs in all the European states.

Moreover, the UK participation to the Euro, would give further strength to the value of the single currency, which would be able to “challenge the US dollar and the Japanese yen as an international currency” (class handout: explaining monetary union).

It would provide many benefit, to business activity, creating a big single market, allowing companies to find new costumer in the Euro-zone. The single currency would be:

“ A logical extension of the single market, the belief that the countries

in the single market will be strengthened and will work better through

a single currency than through diverse currencies which at the present

moment are acknowledged to run the risk of devaluing and throwing

out the relationship between the Member countries”( class handout:

explaining monetary union).

Globalisation and lost of sovereignty:

Finally we have to consider that the 21st century is characterized by Globalisation, this mean that today investor are capable to move capitals, practically freely around the world, and they can borrow money from any country in the world, which has the more suitable interest rate for them. This means that government are very limited in their actions, because they have to make their currency as attractive as possible in order to attract investor and assure stability.

In conclusion, this essay has showed, that those who assert that, the UK entry into the European Single Currency is fundamentally an issue of sovereignty, are only relatively right, because states are not able to exercise full sovereignty, and also that at the base of this issue is the fear that Great Britain will have to face one more time a period like the 1990s.