The New Europe: Understanding the European Union
-Evaluate the arguments for and against UK entry into the eurozone.
The debate over the United Kingdom’s involvement in the eurozone has been prominent ever since the British government decided to withhold UK entry until a later date. Although the euro only became a physical reality across Europe on 1 January 2002, it has been years in the making. The development of the euro dates back to the Treaty of Rome in 1957, when a common European market was declared as a European objective, aiming to increase European prosperity and develop an even closer relationship amongst the peoples of Europe. Following agreements such as The Single European Act (1986) and the Treaty on European Union (1992), the European Monetary Union, EMU, has been introduced, laying the foundations of the single currency. The European Central Bank (ECB) was established on 1 June 1998. It is based in Frankfurt am Main, Germany, and aims to maintain price stability and to conduct a single monetary policy across the euro area. This is done through its own activities and through working with the national central banks. Together, the ECB and the euro area national central banks are known as the Eurosystem. On January 1 2001, the exchange rates of the participating countries were irreversibly set. Member states implemented a common monetary policy and the euro was introduced as legal currency.
Eligibility for participation in the single currency depended on satisfying a number of criteria set out in the Treaty of Maastricht. Along with Denmark and Sweden, both also members of the European Union, the UK has decided to withhold its involvement in the single currency. For a country to take part in the single currency, it had to satisfy a series of criteria laid out by the Treaty of Maastricht. The criteria required that: the national central bank of the country should be independent; the country’s currency should have participated in the Exchange Rate Mechanism (ERM) for at least two years, without stress; the country’s inflation rate should have performers; the ratio of the budget deficit to GDP should not exceed 3% and its debt-to-GDP ratio should not exceed 60%. It so happened that one of these criteria, the one relating to the ratio of government debt to GDP, was effectively ignored, whilst neither Finland nor Italy fulfilled the criteria relating to exchange rate performance. Greece failed to meet criteria, whilst the UK and Denmark exercised the opt-outs negotiated in the Maastricht Treaty. Sweden, not yet a member of the EU at the time of the Maastricht negotiations, was also judged to have failed the criteria. Both Greece and Denmark were generally recognised as ‘pre-in’ countries, that is that they were simply waiting to join the EMU, which Greece actually did. Denmark is awaiting the results of a referendum to decide its fate. Sweden, as with the UK, seem less confident about making further progress towards joining.