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The British Government made a major mistake in not joining the Euro at its outset Assignment

With the beginning of the EMU project in 1999, the British government decided it best for the country to remain outside this controversial and arguably risk bearing project. Many have criticised this decision as part of the ongoing saga whereby the UK remains outside a European project and eventually seeing the benefits decides to join. This was the case with both the economic community and the ERM and when we did join the structure of the project had already been established.

However the clear failure of the ERM on white Wednesday, reflecting in essence the failed preparation for monetary union, illustrates how volatile such a project can be. The UK government lost billions of pounds worth of foreign currency reserves in the ERM project and it should never make the same mistake again. Furthermore, the economic community project has not been anywhere near as successful as predicted.

With the loss of our free trade with our Commonwealth partners, the UK effectively sacrificed the last remaining threads of not only our cultural history with those nations but our sense of dignity in supporting those nations economically that once made the UK a great power of the world. Now we are effectively stuck inside the European project with a common external barrier to all imports from the rest of the world, that not only raises the price of goods for consumers but has effectively placed Europe in a status of Nazi style “self determination”.

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While this continues we are not only being hypocritical as we urge the rest of the world to open their economies to free trade, but we continue to dump our over subsidised agricultural produce, (paid for of course by the tax payer), into these poor nations that cannot possibly compete on the same level. The UK government made a fantastic decision not to take us into the Euro at its outset and should never take the UK into the EMU for not only economic but also clear political reasons.

To begin with in the past 5 years that the UK has remained outside the EMU we have been one of the best performing economies in Europe and the best performing large economy. Growth in Germany and France the two largest economies within the EMU has been stagnant in the past number of years. Significantly the ECB, with a strong German influence has no growth target whatsoever but focuses its monetary policy on ensuring that inflation within the Eurozone remains stable. The Euro is a deflationary project and is only concerned with low prices.

Countries also squeezed their economies in the first place to gain entry and with German growth falling last year at -0. 1% it could easily slip into recession while the UK’s growth remained strong at 2. 1% last year. In terms of authority over the ECB it is only accountable to the weak European parliament. The strategy may also correspond to the preferences of Europe’s biggest power namely Germany however this has yet to materialise as the ECB did not cut interest rates at Germany’s request. The ECB is also an unelected body so we cannot remove the president if we disapprove of his policies.

At the minute although the Bank of England is technically independent, the government still has full control. The bank must ensure inflation stays within the set limits otherwise it must write a letter directly to the chancellor explaining its policy. With a bank isolated from scrutiny corruption may take place and their policy may not be favourable with the economies within the Euro. This goes hand in hand with the underlying problem of the single European currency namely a single monetary policy. There is a major problem in Europe with the “one size fits all” interest rate.

The economies of Europe are not sufficiently converged to justify such a situation. It only takes to look at the problems the Republic of Ireland is having with the significantly lower interest rate when they joined the Euro. Overnight in 1999 the ROI’s interest rate was cut from 5. 5% down to 3% in line with the rest of Europe. This has caused major problems in terms of an overheating of the Irish economy. With economic growth levels now at 6%, the highest in Europe, and local inflation causing prices to soar the Republic is facing major problems.

Because excess demand is not being cut off by high interest rates, Ireland is likely to see prices and wages rise faster than elsewhere in Europe. This will undermine Irish competitiveness and could hurt long-term economic prospects. Although the rising wages in Ireland have attracted reverse migration by some of the overseas Irish, it is unlikely to be enough to damp wage increases, especially in the areas of high labour demand like information technology. With monetary tightening impossible, the standard alternative way to limit demand would be by cutting government spending or raising taxes.

But the Irish government doesn’t want to cut government programs and it would rather cut taxes to stimulate incentives. So Irish demand is likely to stay too high, punishing Ireland’s internationally engaged industries. These industries could contract and become more focused on a domestic market, forcing up Irish unemployment and effectively causing a powerful boom-bust cycle that cannot be controlled by monetary policy. In terms of the UK, we are the most mis-aligned economy within Europe as we are much more affected by economic developments in the US.

Structurally we are also much more interest rate sensitive and as with the Republic of Ireland we have more variable rate mortgages and far more owner-occupation of housing. The interest rate set by the ECB is therefore predicted to have 4 times more of an effect on our economy compared to the rest of Europe according to a study by Oxford Economic Forecasting. This is worrying especially with predictions being made of a possible slowdown and potential bust in the housing market and a lower interest rate would only feed more fuel in an already out of control fire.

Oxford Economic Forcasting also examined the consequence of Britain joining in 1999. They believe that UK property prices would have been pushed 30 percent higher than they are now, the current account deficit would have ballooned by an extra £50 billion and inflation would have been pushed to over 4 per cent. This would have undermined the competitiveness of the UK leading to a bust – and, as a result, Britain would have fallen into a recession by early 2002.

Looking ahead, the study finds that the UK economy would be far more vulnerable inside the Euro to shocks in consumer confidence affecting the housing market also and the inadequacies of a proper interest rate to combat these effects would cause potential deflation and higher unemployment. The EMU does however have its supporters, Some believe that with over 50% of our trade within the EU the benefits to business from the single European market would be maximised. It is true that transaction costs would no longer exist and it is estimated that the UK could save around i?? 3. 6bn at today’s prices.

The EMU would also provide a further boost to trade and investment by removing exchange rate uncertainty. The Euro may also ensure that foreign investment continues to flow into the UK. This is especailly so from the likes of far eastern countries such as Nissan and Toyota who threatened to move to the European mainland unless the UK adopted the EMU. However on the outside of the Eurozone the UK has still managed to retain its leading position as top country for foreign investment. It may be far better to be on the inside of decisions about European interest rates, that inevitably affect us being a part of the European market.

As Lyndon Johnson former US president once said, “It is better to be on the inside pissing out than to be on the outside getting pissed upon! ” Other arguments in favour of the Euro include the fact that the European tough discipline against inflation will ensure inflation is kept under control. However with a target of just 2% this may seam like a valid point however the measure of inflation in the Eurozone and in the UK is different as the UK takes into account the price of housing pushing our inflation higher than Europe so realistically this point is invalid.

Some feel that the lower interest rates in the Euro would be a good thing for the UK. This is not the case! Not only would there be upset in the property market as stated before, but a lower interest rate is an ingredient for a return to boom bust economics. Also the fact that the level of consumer debt in the UK is at record levels would be a serious problem as people would be encouraged to borrow and spend even more! Furthermore, a lower rate of interest might increase the level of imports and with warning on the current level of the current account deficit, a higher level of imports would make the whole situation a recipe for disaster.

People felt at the time that speculators would attack sterling over time as its weakness against the Euro was unveiled. Some felt that benefits of the Euro included the security in that it was backed by a large number of economies and their central banks. However this fear of depreciation was never born out and the speculators didn’t attack Sterling. Yet another benefit may be felt in terms of consumer empowerment through greater price transparency as multinationals will no longer be able to hide under currency fluctuations and rip off Britain will be no more!

This however has not been the case for the Republic of Ireland who For a single European currency to work effectively ultimately there needs to be An argument often put forward in favour of joining the Euro is the fact that the Euroland is the UK’s largest trading partner with 50% of our exports and imports within EU states. This is a fair assessment and On balance, public opinion across the seven euro-zone countries involved in the poll has turned against the new currency, with 41% saying they are happy to have adopted the euro and 52% saying they are not.

Eighteen months ago, 53% said they were happy to have joined the euro and only 36% were dissatisfied. The poll shows that this fall in support has been partly fuelled by anxieties about the falling level of the euro against the dollar. Across the euro-zone the poll records high levels of concern about this, with 79% of voters in Germany worried about it, 82% in the Netherlands, 74% in Spain and 71% in France. Jan 2001 – Guradian The ability of the EU and the euro to compete against America and the dollar demands widespread economic restructuring and sweeping cuts in social spending in particular.

Many voters’ hostility to the attacks on Denmark’s welfare state by the social democratic government of Rasmussen and his predecessors has become associated with opposition to further European integration and a defence of Danish sovereignty. The authorities insist the introduction of the euro has had only a marginal impact on inflation because major expenses, such as rent and mortgages, have been unaffected. Germany’s annual inflation in April, at 1. 6%, was the lowest for two years.

Yet a survey released by the n-tv news channel showed 89% of those questioned thought most shops had used the currency switch to charge more. , “genuine fiscal harmonisation in Europe… in an open, competitive Europe with a common currency, it is damaging for the French to always be taxed more than everyone else”, Jacques Chirac, French President, Le Monde, 7 March, 2002. , “the Europeanisation of everything to do with economic and financial policy”, Gerhard Schroeder, German Chancellor, Times, 22 February, 2002. The arrival of the euro will bring fiscal harmonisation and social harmonisation – it is inevitable”, Nicole Fontaine, President of the European Parliament, 28 March, 2001.

“The fact is that London offers a far more hospitable and stimulating environment for the finance business than Continental centres, which are increasingly handicapped by the moves towards regulatory and fiscal harmonisation that the euro entails”, David Lascelles, Director of the Centre for Study of Financial Innovation, Independent, 18 April 2000. “We don’t agree with the Americanisation of the world. . we are saying that together we can build a new superpower. . . and its name will be Europe”, Pierre Moscovici, French Foreign Minister, Daily Mail, 24 May 2001. “In many European countries, the public pension systems are becoming unsustainable.

If they are not reformed soon, public pension systems in many EU Member States pose a threat to the competitiveness of the European economy, to public finances and ultimately to confidence in public pension systems and in those who provide them”, European Round Table of Industrialists, January 2000. The bottom line is that the Government’s decision on whether or not to join the single currency may very well come down to a straight choice between the euro and delivering its promised improvements in schools, hospitals and transport”, (Roger Bootle, Deloitte and Touche Economic Advisor, 20 July, 2001).

“In a society that is and wants to be democratic, you cannot give an important policy instrument to a group of un-elected technocrats and not have them be open and accountable”, Professor Willem Buiter, former member of the Bank of England’s Monetary Policy Committee, Sunday Times, 23 April, 2000. There’s no way that the rest of Europe wants to be standardising all the income and corporate tax rates across Europe”, Tony Blair, Helsinki Summit, November 1999. “Just 6 months before the European Unions biggest expansion the 10 newcomers are still mostly corrupt disorganised and alarmingly ill prepared for the cold blast of market competition” “The process of monetary union goes hand-in-hand, must go hand-in-hand, with political integration and ultimately political union. EMU is, and always was meant to be, a stepping stone on the way to a united Europe.

Wim Duisenberg, President of the European Central Bank, November 1999. All this talk of the single currency, and harmonisation begs one further question. Why is there no talk of a single language? This would make it even easier for trade etc? The obvious choice would be English – but I can’t see the French or Germans allowing that! Some people seem to genuinely believe that we should join the euro simply to avoid the hassle of changing money when we go on holiday. What is the problem? When abroad you go to cash machine, remove card from wallet, enter PIN, enter amount, and hey presto euros.

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