The European Monetary Union

Topics: Euro, European Union, European Central Bank Pages: 6 (2053 words) Published: December 12, 2012
Research Paper
France and the United Kingdom have very different approaches when it comes to monetary policy. France is a member of the Eurozone and uses the Euro as their currency, with the European Central Bank being their central bank. The United Kingdom has decided to stay out of the European Union and stick with their currency of the Pound. Their central bank is the Bank of England located in London. Both of these countries are 2 of the biggest, most powerful countries in the European Union so they both have quite the impact on how the European Union behaves.

Both France and the United Kingdom are members of the Economic and Monetary Union of the European Union. While France is a full member of the Eurozone, the United Kingdom is only a member of the Economic and Monetary Union of the European Union with an opt out from the Eurozone.

The European Central Bank in June of 1998 and in December of that year the conversion rates between the eleven national currencies and the Euro were established. There was then a 3 year transition phase where the Euro was actual currency and so were the national currencies, although the national currencies had ceased to being printed and legally ceased to exist. The function of the European Central Bank is to administer the monetary policy of the countries in the Eurozone. The current President is Mario Draghi, the former governor of the Bank of Italy.

The primary objective of the European Central Bank is to keep inflation and deflation low, or to maintain stable prices throughout the Eurozone. The European Central Bank has the exclusive right to authorize the printing or issuing of euro bank notes. Member states can issue Euro coins but the amount has to be authorized by the European Central Bank before they can. One of the last functions of the ECB is to regulate the financial and banking market in the member states. This is shown when they bailed out the banks with billions of euros during the financial crisis in 2007. The set up of the ECB is like that of a corporation, there being shareholders and stock capital. The capital 5 billion euros held by each of the national central banks of the member states. So in this sense when it comes to Frances monetary policy, they are only a shareholder in the establishment that decides it. This drastically diminishes the amount of sovereignty they have when it comes to monetary and fiscal decisions.

Established in 1694, the Bank Of England is the second oldest central bank in the world behind Sweden’s. It was established to act as the English Government's bank and to this day it still acts as the United Kingdoms central bank. The Bank was privately owned until its in a sense “nationalization” in 1946. Today while it acts on behalf of government it is an independent organization much like the Federal Reserve in America. The Bank of England is one of eight banks that has the power to issue banknotes in the United Kingdom, but the bank has a monopoly on that power in England and Wales. The bank also regulates the commercial banks in Scotland and Northern Ireland that issue banknotes in those regions.

The United Kingdom had the opportunity to join the Eurozone but it opted out when The Economic and Monetary Union replaced national currencies with the euro. The United Kingdom enabled this opt out in the initial negotiations of the Maastricht Treaty. The United Kingdom was hesitant to join the risky new currency so they devised a plan as when they would potentially join the Eurozone. It would be based on five economic tests. The last time these tests have been assessed was in 2003 and only two of the tests had been met. Despite this, the current Prime Minister, David Cameron, has recently shot down the possibility of joining the Eurozone. He says in an interview from January 2011:

A strong and successful Eurozone is in Britain's interests. We want the countries of the Eurozone to sort out the difficulties they have and we won't stand...

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