Курсовая работа: The UK as a member of the EU

The Maastricht Treaty provided for the establishment of a European economic and monetary union in stages, culminating in the establishment on 1 January 1999 of a single currency, the euro, by the participating EU Member States. Thus on 1 March 2002, for twelve of fifteen countries the objective of monetary integration was realized by establishing a new currency, the euro (€), run by a new EU monetary authority, the ‘Euro system’, made up of the European Central Bank (ECB) and the European System of Central Banks (ESCB)of the member states. The main task of the Euro system is to ensure price stability as the means for minimizing distortions in the allocation of resources and fostering economic growth.

2.3.2 Benefits and costs

The economic reasons for monetary integration concern the benefits and costs of a single currency in an integrated market. The benefits are positively associated with the openness of a country and its volume of international trade and include:

· price transparency across borders, increasing the volume of trade, and enhancing competition and market integration;

· the efficiency of a single money as a unit of account and store of value;

· standardization and lowering of interest rates, including within a stable market;

· Increased policy credibility from elimination of devaluations.

But a single currency involves risk, which are negatively associated with the openness of a country to international trade. The members of a monetary union give up:

· the right to use their own monetary policy and the option to adjust their exchange rate (by devaluation/ revaluation) to counteract asymmetric shock by changes in relative prices;

· to use of seigniorage as a source of budgetary revenue;

· the independence of other national policies (e.g. budgetary policy), which are constrained by the common monetary policy.

But three EU Member States are outside the euro area. These are Denmark, Sweden and the United Kingdom. [11, p.55-56]

2.3.3. The UK case

The UK Government has set out five ‘economic’ tests, which must be met before any decision to join can be made. The five tests are:

· whether can be sustainable convergence between Britain and EMU economies;

· whether there is sufficient flexibility to cope with economic change;

· the effect on investment;

· the impact on the UK financial services industry;

· Whether it is good for employment. [14, p.343]

The results of these tests were announced on the 9^th of June in 2003. Although four of five economic tests for adopting the euro as a national currency had not been met, there were obvious economic benefits to joining. In other words, Britain will inevitably join the euro but later. The details of the assessment are presented in the following:

1 The test of convergence with the euro zone had failed outright.

Although the UK business cycle converge more than several euro zone countries, and inflation, long-term interest rates, government deficit, and debt have all moved closer to that of the euro zone, the test has failed because there was not enough evidence to show that this convergence is sustainable. This is mainly because of some significant differences in the structure of the two economies, more especially in the UK’s housing market. The high level of UK mortgage debt and the dominance of variable rate mortgages make the UK particularly sensitive to changes in interest rate. The link between house prices and consumer spending is more pronounced in Britain than in the euro zone. Demand for housing is much higher than supply, partly because of the rigidity of planning regulations. Therefore, a common European interest rate could lead to instability in the UK housing market. There are also differences, described as medium-risk, in the UK’s pattern of financial market and investment linkages.

Another reason is high trade interdependence. The euro zone is Britain’s biggest market, and the surest and fastest way to speed the process of convergence is for the UK to join the EMU. In 2002, the fourteen members of the EU accounted for 52.5 per cent of British trade in goods. That is why EU enlargement and membership of the euro could lead to an increase in Britain’s trade with the euro zone by between 5 and 50 per cent over next thirty years with no trade diversion from trading partners in other parts of the world.

2. The test on labour flexibility also failed.

Britain's labour market has become more flexible since 1997 and already is the most flexible in Europe. But the euro zone economies are experiencing a lower growth rate than the UK. EU monetary policy would be inappropriate for the UK. The lack of a strong EU central budget mobilizing fiscal transfers, and the limited intra-EU labour mobility, imply that more reforms are necessary to make the British labour market more flexible, e.g. by regional wage settlements and a restructuring of housing benefits to remove the disincentive to move. The UK government would also like to see more flexibility on the EU side, e.g. in the stability and growth pact (SGP), to give member states more leeway to offset asymmetric swings in their economies.

3. The test on inward investment has failed.

The third test is concerned with the prospective effects of a decision to join on the amount of investments. On the one hand, higher investment is supposed to be a reward for joining the euro. Exchange rate risk wills no longer trouble businesses. “More trade and greater price transparency should mean more competition and thus higher productivity growth.” On the other hand, staying out means less investment. As a matter of fact, the share of foreign direct investment dramatically fell in the last year. However, a closer study found that this test should not be marked as passed since the full convergence was not met.

4. The only test to have been passed so far is the impact on financial services.

The City has continued to attract business since the launch of the euro four years ago. This proves that the City will remain a powerful financial centre whether inside or outside EMU. Nevertheless, joining the single currency might strengthen London's position as a financial centre because it would remove any unease about locating operations outside the euro zone. It may also improve the UK's ability to compete for business generated by EU enlargement and the continued development of euro financial markets. In retail financial services the benefits would include lower costs on euro-area transactions, better allocation of investment portfolios, and scale economies for investment funds. Joining the euro could encourage cross-border mergers and acquisitions involving UK companies, induce euro-area banks to locate to London, and strengthen the pre-eminence of the City.