Should the Uk Join the Euro?

Topics: Monetary policy, European Union, Euro Pages: 11 (2562 words) Published: August 20, 2013
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Coursework

Should Britain join the EMU?

Florian Langhammer (P01257652)

Module: Business Environment UK (M07544)

Module/seminarMaureen Pike
leader:

Date: 17/11/2001

Table of Contents

1. Historical introduction of the EMU ….……………….………………….…………………………………………..3 2. Discussion on Britain’s decision whether to join the EMU ……….……….……………………….…….4 1. Recent developments since 1. January 1999 …………………………………….……………..4 2. Macroeconomic perspectives ……………………………………………………………………………..4 1. Advantages …..………………………………………………………………………………..…………4 2. Disadvantages …………………………………………………………………………………………..5 3. Conclusion ……………………………………………………………………………………………….…………………………8 4. Bibliography ……………………….………………………………………………………………………………………………9 5. Appendix …………………………….……………………………………………………………………………………………10

1. Historical introduction of the EMU

With the Maastricht Treaty the EC heads of state and government agreed on a three-legged "European Union" (EU) on December 9 and 10, 1991, which should include a common foreign and security policy, cooperation on domestic and security policy and the creation of a European Economic and Monetary Union (EEMU).

The European Monetary Union (EMU) is to be effected according to a concrete time schedule - the three-stage plan which was agreed upon in the Maastricht Treaty and the conversion plan which was decided December 1995.

To ensure the stability of a single currency, especially in the initial phase, the states participating in the EMU must satisfy the following convergence criteria as constituted in the Maastricht treaty:

1. Inflation criteria: Price stability with no more than 1.5 percentage points above the inflation rate of the top three member states.

2. Interest rate criterion: Long-term nominal interest rates not more than 2 percentage points above the corresponding rate in the three member states with the best results in price stability.

3. Exchange rate criterion: Maintain the normal bandwidths in the exchange rate mechanism of the European Monetary System (EMS) for the last two years without strong tensions.

4. Financial policy criteria: The ratio between public sector deficit and GDP must be not more than 3% per year. Total public sector debt may not make up more than 60% of the GDP at market prices.

The monetary union started on January 1, 1999, where the 11 member states adopted the Euro as an official currency, the European Central Bank (ECB) took over the monetary policy with a focus on price stability at a low inflation rate.

Source: WestLB “Euro Information”

2. DISCUSSION ON BRITAIN’S DECISION WHETHER TO JOIN THE EMU

2.1 RECENT DEVELOPMENTS SINCE 1. JANUARY 1999

Since its launch in January 1999, the euro has revived a steady depreciation relative to the dollar, the pound, and the yen. Despite a recent recovery, it is not clear if this shift will constitute a reversal of the trend observed since October 2000. According to Soper, J C (2001) this development can be explained by a significantly faster growth rate in the US than in euroland, fuelled by an expansionary monetary policy of the European Central Bank (ECB).

After the parliamentary election in June 2001 where Labour revived another landslide success, pressure from British and multicultural business sectors has grown on Tony Blair to join the euro bloc. Most of these companies are major exporters to continental Europe and have been hit hard by the pound’s relative strength to the euro.

However, a final decision depends on the goodwill of Gordon Brown, Chancellor of the Exchequer. He has stated five economic tests in October 1997, that must be passed before Britain is ready for entry, (see appendix).

New potential members of the euro bloc have also emerged since the launch of the single currency. Greece has joined on January 1, 2001 and Eastern European nations such as Poland, Hungary, and the...

Bibliography: *Books
• Griffith, A and Wall, S (2001), 9th ed., Applied Economics,
The euro debate
• Donnelly, B (2000), “UK’s prosperity outside the euro”,
The Times, London, Feb. 1, 2000.
• Taylor, C (2001), “Strains in the eurozone: Economic divergences within Europe may in time force some countries out of the common currency”,
Financial Times, London, July 30, 2001.
• Wren-Lewis, S (2000), University of Exeter, “The Economics of EMU”,
New Economy by Peter Robinson, London, 2000
• Wolf, M (2001), “Nobody can know whether euro benefits would be clear”,
Financial Times, London, June 1, 2001.
*Internet Sources
• WestLB website, “Euro Information”, 2001
http://www.westlb.de/index/1,1061,30126,00.htm
• Britain in Europe, “Briefings, Facts“, 2001
http://www.britainineurope.org.uk
• BBC “News Business Euroland”, 2001
• In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?
Source: Wolf, M (2001), Financial Times.
Should Britain join the EMU?
Module: Business Environment UK (M07544)
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