The United Kingdom Joining the Euro Zone - Essay Example

United Kingdom Joining the Euro Zone Introduction A financial market could not function well without stable money—it is the lifeblood of a country—the ultimate source and reason of its physical existence (Artis, Weber, & Hennessy, 2000). In this sense, the financial sector plays a pivotal role in shaping the future of the present and future generation. An economy with an effective monetary system is the core goal of every nation aiming for a long-term development. Accordingly, to devise a monetary policy requires “an efficient, highly competitive and stable financial system” (Artis, Weber, & Hennessy, 2000). In lieu of that, for a unified and uniform financial system to evolve, some countries in the world are implementing a “one currency policy” such as Europe—half of its member states are actually using euro as its sole legal and national tender—making up the local and economic union called the “euro zone” (European Central Bank, n.d.). Significantly, the economic performance of this union has been characterized by some critics as satisfactory and consistent. Hence, the British government became interested to succumb with the “euro trend” (“United Kingdom,” 2010). Nevertheless, such desire has been attacked with many controversies—all one in saying that UK’s joining the euro zone is problematic and fraught with uncertainty economically and politically. The Euro Zone The euro zone or sometimes called as the “euro land” is a collective group of states bounded geographically and economically adopting euro as their common and legal tender—specifically referring to some European Union’s (EU) member states (“Eurozone,” n.d.). It had twelve members during its foundation on the first day of January 1999. Once a country declares euro as its official sole currency, it does not automatically accord a formal recognition that it’s already part of the euro zone. It is now one of the largest economic areas in the globe having the most liquid legal tender in comparison with others (“Eurozone,” n.d.). As such, its monetary policies are created and regulated through the European Central Bank (ECB)—its main objective is price stability by defining and applying monetary policies throughout the euro land, conducting foreign exchange operations and managing the union’s official foreign reserves (“Eurozone,” n.d.; “The Eurozone,” n.d.). Although the ECB has no shared representations and fiscal policies, it has been able to function well since 1999 and partially achieved its major target. At the present, the euro zone is composed of sixteen members namely, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Greece, Slovenia, Cyprus, Malta and Slovakia (arranged according to the date of their membership from 1999- 2009) (“Euro Zone,” 2010). A country who wants to join is required to maintain the “European Exchange Rate Mechanism” for two years—replacing the old monetary system employed by the European countries for the purpose of sustaining a stable exchange rate between euro and other participating national currencies—thus, avoiding an “excessive exchange rate fluctuation on the internal market” (“Europa,” 2007). In relation, there are European countries which are obliged and not obliged to join the euro zone. Bulgaria, Czech Republic, Hungary, Poland, Romania and Sweden are bound to become part of the currency union—Czech Republic, Hungary and Poland are mandated to join as expressly stated and agreed upon in the “Treaty of Accession 2003” (“Enlargement,” 2003). In contrast, Denmark and United Kingdom (UK) are not required to be a member of the euro land—both has acquired an opt-out from becoming a member of the union basing on the “Maastricht Treaty of the European Union”—this agreement has granted these countries the right not to participate in particular policy areas formulated by the European Union (“Euro,” n.d.). However, UK and Denmark have shown interest in becoming a member of the euro zone. In fact, Denmark is now “an ERM II member” (Hedegaard & Lindström, 1999). UK on the other hand has complied with all the convergence criteria given by the European Union except the ERM II. United Kingdom Joining the Euro Zone The European Monetary Union (EMU) has been up and running (Artis, 2000). Latest surveys and reports have shown how successful has been the move for a single and unified currency amongst the member states of the EU. This union celebrated its tenth year anniversary on the first day of January 2009—Britons were left behind just observing. The UK government has been faced with the dilemma of whether or not to pursue its interest to join the euro zone and if it will decide to join, when—the answer to this query will surely be political (Artis, 2000). This is founded on the idea that monetary unions will always be associated with political unions (Artis, 2000). It has been found out that “three out of four Britons remain” are against “to joining the euro” as revealed by a poll. Another survey showed that seventy one percent of the Britain’s community does not like the idea of “ditching the pound to sign up to the European single currency” (“3 out of 4 Britons,” 2009). Even “the ICM survey for BBC Radio 4’s World At One program found that only twenty three percent of UK’s citizens said yes to the currency if it were put to a referendum” (“3 out of 4 Britons,” 2009). In “the most recent opinion poll,” more than half of the Britons liked the notion that United Kingdom will “withdraw from the European Union and only seventeen percent” believed “in the success of the euro” (Borowiec, 2000). Economically, the case for the UK joining the Euro is problematic and fraught with uncertainty. UK at the present has not been able to meet and pass the five economic tests—the criteria outlined by the UK government itself which ultimately determines the readiness and preparedness of UK to adopt euro as its legal tender and become a member of the currency union—it includes the following criteria: convergence, flexibility, investments, financial services, employment and growth (“The UK’s five tests,” 2002). In addition to these internal requirements, the British government has to comply with the Maastricht criteria before given the authority to adopt euro. The Maastricht criteria “include targets or rules for inflation, limits for budget deficits, national debt, interest rates and exchange rates” (“Maastricht Criteria,” n.d.). Of the aforementioned five requisites, UK has not been able to attain and maintain the required exchange rate or the ERM II as of 2008 (“Maastricht criteria,” n.d.). The move for a single currency has also affected the political affairs of the British government—there is a serious debate and clash of ideas between the Labor party and the Conservatives with regard to the single currency move. It has been previously observed that the Labor party has been silent as to the government’s intention to join the Euro while the Conservatives have been vehemently opposing it (“Will the UK Join,” n.d.). However, this silence has been finally broken when Tony Blair uttered in an interview that he wants Britain to change currency from pound to euro (Assinder, 2002). In other words, the Labor party’s stand “on Europe is in fundamental terms straightforward: it is a pro-European party that genuinely intends to join the single currency” (Mann, 2002). The conservatives reacted and declared that the five “economic tests put up by Blair’s administration were either too meaningless or subjective” (Assinder, 2002). Strangely, in 2008, Gordon Brown—the incumbent UK president and a member of the Labor party has ruled that UK will not join the currency union “despite the sharp reduction in the value of the pound” (Winnett, 2008). Such case is “a remarkable turnaround for a party that was once no less driven over Europe than today’s Conservatives” (Mann, 2002). This event implies that “within the Labor party’s overarching position there are complications” (Mann, 2002). There is a clear political bickering within and between the political parties in UK about the move for a single currency. The Pros and Cons Before UK decides whether or not to pursue its goal of becoming a member of the euro zone, it has to consider first the possible advantages and disadvantages. An online newspaper report enumerated four probable benefits that UK may rip if it will choose to join the Euro. First, the currency instability in the European countries can be ended by irrevocably fixing the exchange rates among the participating countries—an end to internal and external currency instability will allow “exporters to project future markets with” certainty (“Pros and cons,” 1997). Second, there would be less hassle for travelling consumers since they may not need to change money and less red rape “when transferring large sums of money” in other participating countries—a traveler visiting eleven to twelve EU member countries is “estimated to lose forty percent of the value of his money in transaction charges alone” (“Pros and cons,” 1997). Third, “businesses would no longer have to pay hedging costs” in case there are threats of currency fluctuations in the market and “face administrative costs of accounting for the changes of currencies” (“Pros and cons,” 1997). Fourth, there would be lower interest rates since the participating countries “would be locking into German monetary credibility” leading to more investment, jobs and lower mortgage rate (“Pros and cons,” 1997). In contrary, it is also worthwhile to consider the five possible disadvantages in case UK joins the Euro. Foremost, the European countries “with differing economic performances” and various languages have never tried before to establish a monetary union—as opposed to US which has a mobile labor market unified by common language and culture (“Pros and cons,” 1997). This may result “to pockets of deeply depressed areas in which” citizens could not find job “and areas where the economy flourishes and wages increase” (“Pros and cons,” 1997). Secondly, the obligation of the participating countries to consistently comply with the Maastricht criteria “no matter what their individual economic circumstances dictate” might loosen their fiscal stance—“the states will be unable to devalue to boost exports, to borrow more to boost job creation or cut taxes when they see fit because of the public deficit criterion” (“Pros and cons,” 1997). Thirdly, “one central bank may not be able to regulate inflation at the desired level for the member states” (“Pros and cons,” 1997). Fourthly, UK may loss its national sovereignty—“the transfer of money and fiscal competencies from national to community level, would mean economically strong and stable countries would have to co-operate in the field of economic policy with the other weaker countries which are more tolerant to higher inflation” (“Pros and cons,” 1997). Conclusion From the latest polls and surveys, it can be stated that even though UK will not join the Euro, it will still remain economically successful. This is due to the fact that for the previous years, the country was able to survive the global economic recession without being a member of the euro zone. In other words, a country need not adopt a monetary system that it doesn’t need unless it is proven to be more effective and efficient than its former fiscal policy. Moreover, ditching pound for euro would tend to take away the national identity of the Britons. Nevertheless, since there isn’t yet any actual and immense harm for implementing a single currency, it is not impracticable for UK to try and be one with the other European countries who have joined the euro trend. After all, all of them belong to the same continent, Europe. Whatever benefits they could get will ultimately help all the European countries. References 3 out of 4 Britons don’t want the Euro. (2009, January 2). The Daily Mail, 24. Artis, M. (2000). Should the UK join Emu. National Institute Economic Review, 70. Artis, M., Weber, A., & Hennessy, E. (2000). A challenge and opportunity for financial markets. London: Routledge. Assinder, N. (2002, May 15). Blair’s euro enthusiasm. Retrieved from http://news.bbc.co.uk/2/hi/uk_news/politics/1989327.stm Borowiec, A. (2000, January 14). Despite Blairs effort, anti-EU feeling grows. The Washington Times, 13. Enlargement. (2003). Retrieved from http://web.archive.org/web/20031012001806 /http://www.orgalime.org/positions/enlargement.htm Euro. (n.d.). Retrieved from http://www.fact-index.com/e/eu/euro.html Europa. (2007). Exchange Rate Mechanism (ERM II) between the euro and the participating national currencies. Retrieved from http://europa.eu/legislation_summaries /economic_and_monetary_affairs/institutional_and_economic_framework/l25082_en.htm European Central Bank. (n.d.). Map of euro area 1999 – 2009. Retrieved from http://www.ecb.int/euro/intro/html/map.en.html Eurozone. (n.d.). In InvestorWords.com. Retrieved from http://www.investorwords.com /5555/Eurozone.html Euro Zone Members. (2010). In Deardorffs Glossary of International Economics. Retrieved from http://www-personal.umich.edu/~alandear/glossary/lists/EuroZoneMembers.html Hedegaard, L., & Lindström, B. (1999). The NEBI yearbook 1999: North European and Baltic sea integration. New York: Springer. Maastricht Criteria. (n.d.). Retrieved from http://euro-dollarcurrency.com /maastricht_criteria.htm Mann, N. (2002, November 26). Labours long Euro-conversion. Retrieved from http://news.bbc.co.uk/2/hi/uk_news/politics/1701014.stm Pros and cons. (1997, November 21). Retrieved from http://news.bbc.co.uk/2/hi/special_report/single_currency/25081.stm The Eurozone. (n.d.). In Eurocoins.co.uk. Retrieved from http://www.eurocoins.co.uk /eurozone.html The UK’s five tests. (2002, November 21). Retrieved from http://news.bbc.co.uk/2/hi/uk_news/politics/2423783.stm United Kingdom. (2010). In Encyclopædia Britannica. Retrieved from http://www.britannica.com/EBchecked/topic/615557/United-Kingdom Will the UK Join the Euro. (n.d.). In Eurocoins.co.uk. Retrieved from http://www.eurocoins.co.uk/britaintheeuroshouldbritainjoin.html Winnett, R. (2008, December 11). Gordon Brown rules out joining euro despite sharp fall in value of pound. Retrieved from http://www.telegraph.co.uk/news/newstopics /politics/labour/3706339/Gordon-Brown-rules-out-joining-euro-despite-sharp-fall-in- value-of-pound.html Read More