Main Costs and Benefits of Monetary Union in the EU - Research Paper Example

Discuss the main costs and benefits of Monetary Union in the EU. Table of Contents 1. Introduction 3 2. Monetary Union in the EU 4 2.1 Monetary Union in general – aspects, requirements, benefits 4 2.2 General aspects of monetary union in EU 6 2.3 Costs of monetary union in EU 9 2.4 Benefits of the monetary union in EU 9 3. Monetary Union in practice – comparative analysis 11 3.1 Monetary Union and UK – the perspectives of the country’s entrance in the euro zone 11 3.2 Monetary Union and Bulgaria – the expected costs and benefits of monetary union for a country that is expected to enter soon the euro zone 13 4. Conclusion 14 1. Introduction The development of common policies among states that belong in the same region is quite necessary in order for these states to increase their competitiveness within the international community. It is for the same reason that states around the world tend to develop organizations and communities of various forms and purposes, like in the case of International Trade Organization, the World Bank or the International Energy Agency. The positive and negative aspects of such initiatives have to be taken into consideration by countries globally when having to enter an organization of this kind. The political effects of the relevant decision are also critical. In accordance with Bearce (2002, 194) ‘under capital mobility, governments face a political choice: hold an autonomous monetary policy with currency instability or stabilize exchange rates with the sacrifice of policy autonomy’. In other words, countries around the world do not have many choices when having to develop their relationships with other countries in the international community; the participation in unions and organizations of various forms is then proved necessary especially if the improvement of the political or financial position of a country is required. European Union has been the most important example of the specific practice. Despite the fact that the establishment of the Union was related with the interests of specific countries, soon its priorities were changed (Kotlowski, 2000). Through the years, the survival of the European Union has been related with its enlargement; countries from all the region’s areas had been called to participate in the Union – even if the relevant terms and conditions have not been appropriately evaluated in advance, an issue that has been revealed gradually especially within the context of current financial crisis. Current paper focuses on the examination of benefits and costs of monetary union in the European Union zone. The case of two countries – Britain, a country that has been among the first members of the European Union and Bulgaria, a country that is expected to join the European Union zone – is used as an example for describing the context of the monetary union in Europe. The costs of the specific initiative are also evaluated – as possible – and are critically explained – in terms of their role in a country’s decision to enter the euro zone. 2. Monetary Union in the EU 2.1 Monetary Union in general – aspects, requirements, benefits The benefits of monetary unions have been traditionally regarded as the reason for the development of these unions worldwide. However, the effects of these initiatives need to be taken into consideration before taking the relevant risk. In this context it is noted that ‘different types of monetary sovereignty are issues in exchange rate agreements monetary unions; policy sovereignty refers to independence in making exchange rate and monetary policy, legal sovereignty to a country's ability to make its own laws with respect to the unit of contract and medium of exchange’ (Mundell, 2002, 123). The above two aspects of monetary unions are likely to affect a government’s decision on the particular issue. Apart from the monetary sovereignty – as described above – there is always the case of political sovereignty which reflects a country’s ability to keep its superiority towards the international decisions. Today, such sovereignty does not exist. All countries around the world have to give up their decisive role in developing strategic decisions in favour of the international law and policies. Despite the above fact, monetary unions have been proved to be particularly valuable in promoting a country’s interests – referring the country’s strategic position within the international community but also to the strength of its economy. Because the benefits of these unions – as analyzed in the following sections through the example of the European Monetary Union (EMU) are more than their disadvantages, these unions are preferred by the states internationally – even if certain rights of the local government are likely to be limited by entering a monetary union zone. In Europe, the appearance of the scheme of monetary union is quite old; in accordance with the study of Einaudi (2000, 90) ‘monetary unions have been a recurring element in European history, driven by the need to overcome obstacles to trade caused by the fragmentation of political authority; between the 14th and the 19th centuries, a series of coinage unions were set up in the German speaking world, which served as models for the Latin and Scandinavian monetary unions in 1865 and 1872’. However, the unions described above did not have the duration or the effects of EMU. For this reason, these unions are not particularly mentioned in current social and financial history of European Union; rather the benefits of EMU are highlighted – using as a justification the fact that the development of euro through the years has been quite important – leading even to the limitation of the power of dollar as a currency with global recognition. 2.2 General aspects of monetary union in EU The historical development of monetary union in Europe has been extensively analyzed in the literature. In accordance with Salvatore (2002, 153) ‘the creation of the euro at the beginning of 1999 represents one of the most significant events in international finance since the end of World War II; never in the past had a group of sovereign nations voluntarily given up their national currency for a common currency’. The above study explains the assumptions made regarding the study of Einaudi (2000) presented above. The appearance in the past of other monetary unions across Europe – as described by Einaudi (2000) – cannot be compared with the case of euro. The latter has been proved to be quite strong in order to change the global distribution of currency power; the international market which has been governed for years by dollar has welcomed euro as a currency offering stability in the long term (Harrison et al., 2006). The response of euro to the recent financial turbulences worldwide has been a significant indication regarding the ability of the particular currency to survive in difficult financial conditions. On the other hand, the initial response of the member states to the monetary union across Europe has not been positive. In fact, in the study of Arrowsmith (1995) it is noted that ‘it is now looking increasingly plausible that, at some point between the middle of 1997 and the beginning of 1999, a number of EC Member States (perhaps even a majority) will move to the final stage of Economic and Monetary Union’ (Arrowsmith, 1995, 76). However, as it has been proved up to now the decision of governments in Europe to enter the euro zone has been more difficult as initially estimated. In fact, there are still member states that have not entered the euro zone (the case of Sweden presented above is an indicative example). It seems that the expected benefits of monetary union in Europe have not persuaded the governments in member states to take the relevant risk. On the other hand, as the power of euro in facing global financial turbulences is being tested – the entrance of member states in the euro zone is expected to be highly promoted across Europe. On the other hand, it is noted that ‘the increasing role of the euro as an international reserve medium equal to the US dollar reduced the monetary policy autonomy of countries importing more goods and services from the euro zone than from the dollar zone’ (Plumper et al., 2006, 213). The above study is based on the examples of United Kingdom, Sweden and Denmark – countries that have entered the European Union but are still quite skeptical in order to change their monetary standards and accept to enter the euro zone. Of course, the decision of the above countries to delay their entrance in the EMU could be potentially justified by the negative effects of the specific union – which have been found to be limited in any case. The specific issue is analyzed in the study of Perez (2002) where it is made clear that ‘European Monetary Union involves a decentralization of wage bargaining (centered at the national level) in relation to monetary policy (centralized at the European level); the imposition of restrictive monetary policy in a fragmented wage bargaining context in which workers nonetheless have substantial bargaining rights tends to have perverse effects’ (Perez, 2002, 1198). Italy and Spain are used as examples of the limitation of the bargaining power of employees across Europe; however, it could be supported that difficulties in bargaining the wages in the member states has not been the result of the introduction of euro; it is rather the result of the failure of European Central Bank to control the development of financial deposits of the financial institutes across Europe; when the crisis made clear these institutes have been proved unable to support their activities. The intervention of the governments in all member states has been proved necessary in order for these institutes to survive during the crisis; again, this has been a phenomenon developed in both the countries of euro zone and the rest of member states that have not accepted euro as their official currency. Through a different point of view, it is supported by Wolf et al. (1996) that financial factors are not the only criteria used for the evaluation of effectiveness of the EMU. Other factors have been also found to influence the financial performance of states that have entered the euro zone. In this context, it is made clear that ‘the interests of governmental actors (intergovernmental institutionalism) or the interests of supranational and transnational actors (supranational institutionalism) have led to the formation of the Economic and Monetary Union’ (Wolf et al., 1996, 355). In accordance with the above view, the interests of the Community have not been of critical importance for governments of the member states to decide the entrance of their countries in the euro zone. Rather the promotion of specific political interests of these countries is set as a priority when having to decide the entrance of these countries in the EMU. 2.3 Costs of monetary union in EU The costs related with the EMU cannot be precisely estimated; these costs are likely to be differentiated among member states in accordance with the following criteria: a) the geographical position of the country – related with its ability to influence the strategic political decision of European Union, b) the country’s financial strength – both in the short and the long term, c) the political context developed within the particular country, d) the country’s strategic alliances and e) the prospects for the country’s development in the future – as estimated through its current financial position, the strategic plans developed in various industrial sectors and the responses of the population to the government’s strategic proposals. In any case, the costs of entering the EMU could refer to the following issues: a) expenses for reviewing the country’s monetary policies, b) expenses for changing the country’s system of payments and financial transactions – including the software required and the costs of relevant training of the people working on the specific project and c) expenses for informing people across the country for the benefits of euro – both in the short and the long term; the specific strategy would help to limit the potential oppositions to euro as the official currency. 2.4 Benefits of the monetary union in EU The development of the European market has been proved to be a challenging task. Most of the EU’s members have tried to apply a common monetary policy, however there were always strong oppositions towards the realization of the specific target. One of the most characteristic examples of this kind is the case of Sweden; the specific country have been supportive towards the monetary union within the borders of Europe; however, the trade unions of the country have adopted a negative approach regarding the promotion of common monetary practices across European Union. In the study of Bieler (2003) it is noted that ‘as in 1994 on the question of European Union (EU) membership, there is a split between transnational sector unions supporting European Monetary Union (EMU) and national production sector unions rejecting it’ (Bieler, 2003, 385). The example of Sweden is used by Bieler in the above study in order to emphasize the effects of membership on countries that are financially strong – like Sweden. When these countries are called to join a monetary union, the risk of such a decision on their economy has to be taken into consideration. Through another point of view, Sweden is the example of a country that has been – by tradition – financially strong and no need for participation in Unions like the European Union would exist; however, even for this country the entrance in the European Union was considered as necessary – the above country entered the European Union in 1995; still the adoption of euro by Sweden has not been accepted by the country’s government – a potential indication that the benefits of the specific initiative may not be the ones expected. One of the most important benefits of euro has been its impact on the increase of political power of European Union within the international community. The specific issue is highlighted in the study of Mahieu et al. (2005) where it is noted that ‘a single EU representation at the International Monetary Fund (IMF) would affect the balance of power in the institution through a fundamental reallocation of quotas and executive directors among its membership’ (Mahieu et al., 2005, 493). The increase of power of euro within the international market has been proved to be related with the increase of power of economies of member states towards their rivals worldwide. 3. Monetary Union in practice – comparative analysis 3.1 Monetary Union and UK – the perspectives of the country’s entrance in the euro zone In order to understand the potential effects of euro on Britain’s economy it is necessary to refer primarily to the general aspects of UK’s current financial policies and practices. Britain has been a country closely related with dollar; in fact, the country’s trade within the international market is heavily depended on dollar. The development of commercial relationships between Britain and member states has been unavoidable – UK is one of the first participants in the European Union and the country has to support the other member states in the commercial sector. However, up to now the opposition of local population to a potential entrance in the euro zone has been strong; for this reason the British government has avoided to decide the entrance of the country in the EMU – even if through the years the specific decision has been proved to be negative for the development of the national economy. The potential entrance of Britain in the EMU could be related with a series of specific effects: a) prices in the all goods and services would be decreased – the current balance between the sterling and the euro is still in favour of the former even if the latter has managed to reduce the gap, b) prices in the country’s property market – a critical factor for the development of the British economy – would be also expected to be decreased; this could lead to the limitation of a series of taxes related with houses and land across Britain – the limitation of the country’s income by the specific sector would be the next step; it is not quite clear however whether the national economy could bear the specific measures – severe instability and turbulences would appear, c) current financial crisis in the global market could negatively influenced the country’s decision to enter the EMU – financial turbulences related with the crisis in the international markets should be appropriately faced before a relevant initiative is taken. Finally, d) the country’s employment market would be adversely affected; wages across the country should be aligned with the ones given to employees in all members states – that participate in the EMU; however, because the cost of life in Britain would take a while to be adjusted with the relevant cost in other member states, employees in Britain would not be able to cover the cost of their living needs – severe social turbulences would be expected. The costs of entering the Union would be similar with the ones explained in section 2.3 above. Additional costs would be possibly required taking into consideration that Britain is a country with a well developed commercial activity worldwide. 3.2 Monetary Union and Bulgaria – the expected costs and benefits of monetary union for a country that is expected to enter soon the euro zone In the case of Bulgaria, the country’s entrance in euro would be expected to have specific benefits (Gros et al., 2004). More specifically, the adoption of euro by the specific country would expect to have the following effects: a) improvement of the country’s economy – the financial support by the European Union’s programs would be regular helping the country to face the challenges of the global market, b) increase of wages in all industrial sectors – being aligned – as possible – with the wages of employees in other member states – employees in Bulgaria would be expected to be benefited – on the contrary with employees in Britain, c) increase of prices of property in all regions – a positive and a negative element – current prices of properties in Bulgaria attract investors from all countries in Europe who want to protect their investments against the crisis, d) the cost of goods and services in all industrial sectors would be also increased – also positive and negative aspect of the country’s entrance in the EMU (Watkins, 2008). By its entrance in the euro zone, Bulgaria is expected to lose its competitive advantage towards the other member states – the low prices of its goods and services – also the low level of value of properties across the country (Dimitrova, 2004). The costs from entering the euro zone would be expected to be the ones analyzed in section 2.3; differences would be expected to exist compared to the similar expenses of Britain, a country that is already well developed and the update of its IT systems and commercial practices would be expected to have a lower cost than the relevant initiatives of Bulgaria. 4. Conclusion The entrance of member states in the EMU has been proved to be related with a variety of political interests. Towards this direction, it is noted that ‘efforts by virtually all the member states to meet the Maastricht criteria for joining the single currency club are impacting negatively on Social Europe; moreover, with the member states signing a deflation-oriented Stability Pact, this cold climate threatens to spill over into the actual operation of the new Euro- zone’ (Teague, 1998, 117). In other words, the priorities set by the European treaties and rules have not been met – at least not fully – by the member states. Still there is a strong resistance by the national governments to promote their own will instead of the European principles. The increase of the number of cases brought before the European Court of Justice is a fact that proves the above view. On the other hand, the differences between the national policies and the European practices have been a lot; in many cases, governments in member states refuse to take immediately measures in order to adapt the national law with the European one. The specific issue is of critical importance for the promotion of the Union’s principles and priorities. The effects of the relevant initiatives on the national social and political framework have to be carefully examined. In accordance with Clark et al. (2002, 205) ‘the construction of a monetary union with a single currency in Europe raises serious concerns for those who understand the democratic process as one in which social groups compete on different ideological programs’ (Clark et al., 2002, 205). National governments need to set as a priority the national culture and laws; European rules should be applied at a next level – only if a serious gap could be identified in the protection of rights of individuals or the country’s response to specific political and financial challenges; otherwise, no intervention of the European rules in the national political and judicial context would be justified. Britain and Bulgaria are countries with different historical contexts; their economies are also at different levels (Dyson, 2002). However, when having to decide on the entrance of these countries in the EMU, their governments have to face similar challenges – as explained above (Aspinwall, 2004). EMU has been proved to be related with benefits and disadvantages; the former are more compared to the latter – for this reason the enlargement of the EMU has been continuous leading to the increase of the political power of Europe within the international community. Bibliography A. 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