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Essay Subject: Examines position of UK on adoption of Euro, monetary union, reasons for delay, impact on pound, politics, risks, restrictions.... More...

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Paper Abstract: Examines position of UK on adoption of Euro, monetary union, reasons for delay, impact on pound, politics, risks, restrictions. Paper Introduction: POSITION OF THE UNITED KINGDOM (1998) ON EURO ADOPTION Introduction This research examines the position of the United Kingdom (UK) toward full participation by the UK in the common currency (the Euro) which will be implemented by participating member states of the European Community (EC) on 1 January 1999, with full monetary integration of the participating nations to be effective on 1 January 2002 (the date on which Euro coins and notes will begin to circulate). As confirmed at the meeting of the leaders of the 15 member states of the EC on 2 May 1998, the UK will not be one of the 11 member states that will initially participate in the European common currency, which will create the full monetary union of those states (Cornwell, 1998). The remainder of this examination reviews the factors that most infl Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Opponents within the UK of the country's participation in the Eurocommon currency also contend that it would be an unwise move for the UKbecause of the high risk of failure of the Euro as a common Europeancurrency (Cornwell, 1998). Political integration, while follows monetaryunion in the scheme of things, will end national sovereignty for memberstates of the EC. At this point, however, this issue is so much politicalfroth, as Germany's Bundesbank will, in effect, be the Central Bank for theEuropean Union under the common currency scheme and will wield the majorinfluence in the decisions of the Central Bank. Independent on Sunday (London), 14. When the European MonetarySystem (EMS) was created in 1979, the UK was a member from its inception,however, the UK opted not to participate in the major function of thesystem-exchange rate management, which involves operation of the ExchangeRate Mechanism (ERM), throughout most of the organizational existence ofthe EMS. One temptation is then tobend the Maastricht rules. References Andrews, A. The current position of the UK toward non participation in the Eurocommon currency initially appears to be driven by both political andeconomic motivations. (1988, 21 March). Independent on Sunday (London), 1. In order to ensure thehighest possible degree of macroeconomic balance and an appropriatemacroeconomic policy mix, it will be important for the members of theprospective monetary union to pursue more stringent objectives for fiscaldeficits than seem to be required by the provisions of the MaastrichtTreaty" ("Policies For Sustained Growth in Industrial Countries," 1995, p.26). Further,business firms are treated in a similar manner (Gelb, 1988). Bank of England QuarterlyBulletin, 37, 73-82. In practice, they strain most people'spatience. Economics as an elite folk science: Thesuppression of uncertainty. Thus, persons who work in a member country other than theircitizenship country are entitled to all of the social benefits of the hostcountry, and are taxed the same as host country citizens. Proponents of full participation by the UK in the Euro common currencypoint out, however, that the Euro is going to be a reality in the economiclife of the UK whether the country is a full participant or whether the UKcontinues to attempt to act as an insular state. New York Times, B1. Monetary and fiscal harmonization were viewed by the Thatchergovernment as threats to the status of the British pound, and a threat tothe status of the pound was viewed by the Thatcher Government as a threatto British sovereignty. It was not until the ratification of the Treaty ofMaastricht, however, that specific criteria for full participation by an ECmember state in EMU were adopted ("From Here to EMU," 1995). This volatility caused the Thatcher government tofeel that fulfilling ERM requirements for exchange rate stability mightplace to much pressure on the UK economy. Scott, A. Within the contextof the contemporary globalization of the economic activity of all nations,to say nothing of the massive economic integration that exists alreadywithin the EC, however, it is unrealistic to assume that the Bank ofEngland will be able to exert any meaningful degree of control overmacroeconomic variables within the UK as long as the UK remains an openeconomy. "Goodhart's Law" holds that any monetary aggregate which theauthorities try to control automatically becomes subject to distortionswhich render such control difficult in the extreme. Andrews, E. There is a difference between the Britishpound and the German mark, however, it that in time of stress investors andspeculators tend to dump the British pound, while the mark is seldomdumped. UK participation in the ERM did not begin until October 199 (Haldane, 1991). When dole queues are long, tax revenues are lower, and so budgetdeficits are harder to cut-especially when the criteria rule out adevaluation of the currency. (1993, 22 May). It likely will take awhile for the BlairGovernment to persuade the country and itself that the surrender of somedegree of sovereignty is going to occur whether the British are in or outof the common currency scheme, so they may as well work from the insidewhere they can obtain greater benefits. The adoption of the Euro by the 11 states opting toparticipate in the common European currency emanates from this treaty. (1995, 5 August). This outcome providedsome degree of confirmation for "Goodhart's Law," as the attempts by theBank of England to control the growth of credit failed because ofdistortions introduced into the UK credit market by the "corset" policyitself (Hodgson, 1993). 25). Journal of Post Keynesian Economics, 17(2), 165-184. Beyond meeting the agreed ceilings on budget deficits, however,a broader question concerns the appropriate degree of fiscal balance thatthe member states of the EU should strive for over the medium term. Nevertheless, existing deficitreduction plans of most member states remain relatively unambitious"("Policies For Sustained Growth in Industrial Countries," 1995, p. The Blair Government in 1998 is at best cautious towardfurther European unification involving the UK. A second temptation is to trim one's sails tothe wind" ("The EU's Feel-Bad Factor," 1995, 58). European monetary union has been envisioned since the founding of theEC. (1998, 3 May 1998). (1998, 3 May). First, the British pound is one of thepetro currencies because the UK is a net petroleum exporter. Infact, the development of the British position stretches back in time to theoriginal decision by the UK not to become a founding member of the EuropeanEconomic community (EEC). Not everyonein Britain agreed with Thatcher, however, and her resistance to Britishparticipation in the ERM was overcome just prior to her own ouster as primeminister. New York Times, B1. (1998b, 5 May). Gelb, N. Times (London),6-7. Position of the United Kingdom (1998) on Euro Adoption Introduction This research examines the position of the United Kingdom (UK) towardfull participation by the UK in the common currency (the Euro) which willbe implemented by participating member states of the European Community(EC) on 1 January 1999, with full monetary integration of the participatingnations to be effective on 1 January 2 2 (the date on which Euro coins andnotes will begin to circulate). ... Short of leaving the currency-grid pathway tomonetary union (as Britain and Italy, to the benefit of their exporters,did in September 1992), the only way out is to keep chanting 'no pain, nogain.' Arguably, that is working in Holland. Common EC responses to international political crises, defense, andother matters are also envisioned by the Single Act. Theadvent of more complete economic integration in the EC is intended to bringabout the free movement of goods, services, capital, and labor within theEC, and provide more than 32 million Europeans with free commerce similarto interstate commerce enjoyed in the United States. To get unanimous assent from the 12 member countries tothe Single Act, it was necessary to insert a clause was into the Act whichenabled member countries to opt out of an action, if they felt it wasdetrimental to their national interest. (1998a, 4 May). After Euro accord, next question iscredibility. (1995, 3 September). The Euro starts life with asquabble. Business activityincreasingly will be denominated in the Euro in business-to-businesstransactions, and likely in the not too distant future in consumertransactions as well. The Future of the UK Position Over the long-term, it is highly likely that the UK will become a fullparticipant in the common currency scheme, just as the country belatedlyjoined both the EC and the EMS. Maastricht: Europe celebrates. From here to EMU. Critics also contend that concern about the aggregate position offiscal policy across the members of the monetary union is significant.According to these critics, a bias toward "easy fiscal policy and tightmonetary conditions would hamper growth and complicate external exchangerate policy vis-à-vis other major currency areas. This part of the act,however, causes Britain, in particular, to worry about its independentfreedom of action. The British position involves a complex set offactors, all of which are affected by British history and the question ofsovereignty, on which the major political parties in the UK have shiftedtheir own positions on more than one occasion. "Both the Council and the Commissionhave stressed that deficits will need to be much lower than the Maastrichtcriterion value by the end of the century. As confirmed at the meeting of the leadersof the 15 member states of the EC on 2 May 1998, the UK will not be one ofthe 11 member states that will initially participate in the European commoncurrency, which will create the full monetary union of those states(Cornwell, 1998). Opting out, however, is adifficult process, and a risky step for both the EC, as an entity, and forindividual countries. Community control over the pound opposed.Times (London), 5. In turn, the demandfor loanable funds available from financial institutions within the marketwill decline. Economically, the motivation appears to be a fearthat the government of the UK will lose the capacity to manage the economythrough the policies of the Bank of England (Brown & Butler, 1998). By thetime Margaret Thatcher had become Prime Minister, the positions of the twopolitical parties had reversed. The "corset,"attempted in the UK, failed because borrowers avoided the financialinstitutions, the banks, to which the "corset" restrictions applied. Thus,the monetary aggregate that the Bank of England was attempting to control,the growth of credit in the economy, was able to grow in spite of the"corset," as borrowers located available funds both from sources locatedoutside if the UK and from sources from within the UK (non-bank financialinstitutions) to whom the "corset" did not apply. Further, businesses in particular may havedifficulty in avoiding exchange rate risks should they fail to denominatemany of their transaction in Euros (Andrews, 1998b). Again, the Thatcher government felt that the fluctuations inpropensities to hold the pound would make it difficult for the Bank ofEngland to fulfill ERM exchange rate stability requirements. There were two major reasons why the British delayed the beginning oftheir participation in the ERM. Policies for sustained growth in industrial countries. (1998, 5 May). Politically, the motivation revolves around theissue of sovereignty. Andrews, E. The economy as an organism-not a machine.Futures, 25(4), 392-4 3. The UK did not join the EEC for nearly 15 years subsequent to thecreation of the regional economic community. The Thatcher Government opposed this level of Europeanintegration for the United Kingdom, and the Major Government wasambivalent. The Single Act also changed voting within EC bodies to (1)a proportional system based both on population, and financial contributionto the EC, from an equal vote for all members, and (2) a 56 percentmajority vote, from a unanimous vote, in both the European Commission, andthe Council of Ministers. But in other countriesthe 'we'll manage it' mantra is less convincing. Butler, K. Currency markets largely discountmaneuvers over Euro. As an example, when the EECwas first proposed, the Conservative Party favored joining the EEC, whilethe Labour Party opposed British membership in the organization. Thus, if interest rateswithin the market are higher than interest rates available to firms withinthe market from financial institutions located outside of the market, thefirms will seek their loans from outside the market. Ravetz, J. Cornwell, R. The Single Act of Luxembourg, which,by 1987, had been ratified by all EC member countries, is the vehicle thatis designed to bring about increased European economic integration. Simplymeeting the 3. Both the UK and the EC have experience within the context of suchefforts to control macroeconomic variables (Ravetz, 1994). Britain and European unity. The exchange rate mechanism of the EuropeanMonetary System: A review of the literature. Cowell, A. (1991). (1998, 3 May 1998). (1995, May).World Economic Outlook, 9-34. One contention of the opponents within Britain of the participation ofthe UK in the common European currency is that the Bank of England willlose its ability to influence the direction of the economy through themanagement of macroeconomic variables (Cowell, 1998). New York Times, B1. Thus, it is unlikely that the procedure will be usedoften. Economist, 328, 55, 57. The remainder of this examination reviews the factorsthat most influence the British position toward participation in theEuropean common currency, with a view toward decisions the UK likely willmake in relation to their continued long-term participation in the EuropeanMonetary Union (EMU). EU surveillance activities,including the first excessive budget deficit procedure in the fall of 1994,indicate that the EU intends to apply the convergence requirementsstrictly. Symbolic Weight of Mark Makes GermansSkeptical Over Euro. Concerns over the EMS and the pound were not alone the cause ofreservations by the Thatcher Government with respect to full UKparticipation in the EC (Gelb, 1988). Apathy and taut nerves greet dawn ofthe Euro. The final level of regional integration, political union,involves the creation of a single government over all member countries, andthe loss of national identity for the individual member states of theunion. Such a development is exactlythe scenario that developed in the fall of 1992. Haldane, A. The Britishpound, as a consequence, tends to be a more volatile currency than do theother ERM currencies. The convergence criteria set out in theMaastricht Treaty, according to this line of argument, were conceived asminimum requirements aimed at ensuring a high degree of financialdiscipline and stability in the monetary union ("Policies For SustainedGrowth in Industrial Countries," 1995). Economist, 336, 57-58. New York Times, B1. An open economy constrains the ability of a monetary authority, suchas the Bank of England, to control interest rates because the openness ofthe economy permits financial institutions from outside of the market toloan money to firms operating within the market. The creation of the EMS represented a major step toward eventualmonetary union. Position of the UK Toward Participation in A Common European Currency The development of the British position toward participation in acommon European currency pre-dates the contemporary issue of the Euro. Second, the pound is amore widely held currency than are any of the ERM currencies, with theexception of the German mark. The doom sayers,however, continue to question the credibility of the Euro (Andrews, 1998a). In such a scenario, one of two outcomes likely will occur.First, the financial institutions within the market will suffer substantiallosses in the monetary authority attempts to maintain interest rates athigher levels that prevail outside the market, or second and more likely,the financial institutions within the market will pressure the monetaryauthority to relax its controls so that they may compete with the financialinstitutions located outside of the market. (199 , 14 July). Brown, C., & Butler, K. It is more likely that, in instances where member states areseriously divided on a political response, no action will be taken in thename of the EC. The Treaty of Maastricht is designed to integrate the currencies ofthe member nations of the European Community, and to lead to greaterpolitical integration within the Community ("Maastricht: EuropeCelebrates," 1993). This scenario also developed in the fall of 1992, and theBritish government felt compelled to temporarily withdraw from the ERM todefend the value of the pound (Scott, 199 ; Haldane, 1991; "Maastricht:Europe Celebrates," 1993). Although details of taxation programs and welfare schemes were notspecifically addressed in the Single Act, the Act did proscribe the use ofsuch factors to deny the free movement of goods and services within theCommunity. Independent on Sunday (London), 14. This scenario, of course,is one of the major worries of the British opponents of UK participation inthe common currency scheme. In the theory of the Maastricht Treaty, the convergence criteria "addup to good economic housekeeping. M. G. How the bold step to unity couldbackfire. percent deficit target by the end of 1998 would still leavesubstantial underlying economic imbalances, as such an outcome likely wouldcoincide with a relatively high level of capacity utilization as thecurrent economic expansion matures. Deal with France to allow Dutchman tomanage the Euro. A part of the concerns over the credibility of the Euro stems from thecontentious debate over the titular leadership of the new central bank(Andrews, 1998c). Economist, 336, 72. Today, a Labour Government is in office,and the British government is opting-out of initial participation in thecommon European currency, even though the UK meets the convergence criteriaestablished for Euro participation (Butler, 1998). (1994, Winter). Hodgson, G. (1998c, 4 May). The Single Act also prescribed reciprocity between membercountries. The scenario described,however, assumes that firms within the market will be credit-worthy anddesirable as customers to financial institutions located outside of themarket. Monetary union is a component of the regional integration of nations.The fourth level of such integration is economic union includes the addingof monetary and fiscal harmonization among member countries to the commonmarket system. (1993, may). The EU's feel-bad factor. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.