Was Britain Right to Stay Out of the Euro - Example

Was Britain right to stay out of the Euro Introduction Britain has been a member of the European Union since 1973. Due to its economic power, Britain has soon become one of the most powerful members of the Union, along with France, Italy and Germany (Craig 2010). Despite its long presence in the Union, Britain has decided not to participate in the Euro zone. This decision has been strongly criticized by the other members of the Union (Craig 2010). However, the current crisis in the Euro zone has justified the decision of Britain to keep its currency. The question whether Britain was right to stay out of the Euro is reviewed in this paper. Reference is made to various aspects of the above decision, including the purpose of the Union and the structure of UK economy. It is proved that Euro could not particularly benefit Britain. This fact is made clear by the figures related to the current status of the UK economy, including its balance of payment. In the short term, the specific decision has set barriers in the development of proactive cooperation between Britain and the other members of the Union. In the long term, the refusal of Britain to join the Euro zone has saved the country from severe implications. If comparing the advantages and disadvantages, it is made clear that the decision of Britain to reject the Euro has harmed the Euro zone; still, the benefits of this decision for the British economy cannot be ignored. 2. Britain and Euro 2.1 The purpose of the European Union Different views exist in the literature regarding the reasons for which the European Union was established. The most common view is that the European Union was created in order to ensure that the war among the countries of Europe will no be repeated in the future (Craig 2010). In its first form, the Union was named as ‘European Coal and Steel Community (ECSC)’ (Muntigl, Weiss and Wodak 2000, p.51) and focused on the industrial cooperation between six countries, including Italy, France and Germany (Muntigl, Weiss and Wodak 2000, p.51). The ECSC was established in 1951 and was based on an idea of ‘Robert Schuman, the French Foreign Minister’ (Muntigl, Weiss and Wodak 2000, p.51). Schuman thought that the creation of an industrial union would discourage the countries involved, especially France and Germany, from continuing the war between them in the future (Muntigl, Weiss and Wodak 2000, p.51). The idea of Schuman was verified in practice. Since 1951 France and Germany have developed a strong commercial cooperation. Still, political cooperation was not part of European Union, at least in 1951. In other words, the first purpose for the establishment of the Union has been the elimination of the chances for the appearance of armed conflicts in Europe. In 1957, the members of the ECSC decided to change their priorities. Instead of focusing on industrial cooperation, the members of the ECSC decided to focus on economic cooperation (Muntigl, Weiss and Wodak 2000, p.51). The Treaty of Rome ‘signed in 1957’ (Muntigl, Weiss and Wodak 2000) resulted to the establishment of the European Economic Community (EEC), which is quite close to European Union in its current form. Through the Treaty of Rome the importance of economic cooperation in the context of Europe was made clear. After the promotion of industrial and economic cooperation, the European Union had to support another target: the increase of political cooperation among members of the European Union (Muntigl, Weiss and Wodak 2000, p.51). Craig (2010) noted that the development of effective political plans and common foreign policies across the member states is rather unachievable, mostly because its state has different interests from other states. These interests are served using different policies, which cannot be controlled by the international law and can be only criticized as of their potential opposition to existing legal rules (Craig 2010, p.423). Using a similar approach, Dosenrode-Lynge and Halkier (2004) support that European Union was established for achieving two targets: ‘for fighting war and for supporting the creation of a European Federation, even in the long term’ (Dosenrode-Lynge and Halkier 2004, p.14). It is further explained that the purpose of the European Union has been changed through the decades (Dosenrode-Lynge and Halkier 2004, p.14). Instead of focusing on the achievement of specific economic benefits, ‘the supporters of the Union tried to focus on the promotion of liberalism’ (Dosenrode-Lynge and Halkier 2004, p.14). In its modern form, the European Union is considered ‘as a genuine union’ (Dosenrode-Lynge and Halkier 2004, p.14). However, the change in the priorities of the European Union has also a negative aspect: the control over the activities of the Union has become more difficult. The increase of the power of dominant member states, such as France and Germany, to decide without asking for the consent of the other members of the Union has caused further instability in the European Union (Dosenrode-Lynge and Halkier 2004, p.14). Such practices show another purpose of the European Union: the promotion of interests of certain member states (Dosenrode-Lynge and Halkier 2004, p.14). 2.2 Crises wihin Euroland Since its first establishment, the European Union has faced several crises. All these crises had a common characteristic: they focused on the failure of the Union to achieve certain of the targets of its founders and members (Welfens 2001). Through the decades, these crises have become stronger. According to Welfens (2001) a common reason for the appearance of crisis in the European Union has been the following one: certain of the member states have tried ‘to promote the depreciation of Euro for reducing the rate of unemployment at national level’ (Welfens 2001, p.107). Reference is made specifically to ‘France and Italy’ (Welfens 2001, p.107), which have used this practice for controlling unemployment and improving the performance of their economy. Such behaviour is opposed to the interests of other member states and can threaten the integration of the European Union. The crises in the European Union have been also enforced by another practice: almost all countries of the European Union avoid controlling the debt of their banks (Baldwin, Gros and Laeven 2010, p.9). More specifically, each member state is usually allowed ‘to have a debt stock of 70% of its GDP’ (Baldwin, Gros and Laeven 2010, p.9). Still, within each member states banks may reach quite high levels of debt stock (Baldwin, Gros and Laeven 2010, p.9). In Germany, the debt of banks is estimated to ‘300% over the country’s GDP’ (Baldwin, Gros and Laeven 2010, p.9). Banks in Austria and France face similar problems (Baldwin, Gros and Laeven 2010, p.9). The above problem is quite critical. In fact, the current crisis in European Union has been related to the failure of European banks to control their debt (Baldwin, Gros and Laeven 2010). Vural (2011) explains that the current crisis in European Union has its roots in the crisis of 2007-2008. Because of that crisis, banks across Europe had failed in managing their debt (Vural 2011, p.260). The financial support towards the banks for facing this problem ‘has followed by austerity packages that caused severe social conflicts’ (Vural 2011, p.260). In other words, the key reason for the current crisis in European Union is the lack of appropriate plan for managing the debt of European banks. Calhoun and Derluguian (2011) seem to accept a similar view. The above researchers note that in Europe bank debts tend to be considered as sovereign debts, like for example in the case of Greece (Calhoun and Derluguian 2011, p.147). In this way, the financial support towards the banks is necessarily followed by austerity measures, a fact that has enhanced social and political instability across Europe. 2.3 The structure of UK economy The entrance of Britain in the Euro zone would result to several problems. The structure of the UK economy would prohibit the successful incorporation of Britain in the particular zone. Of course, like all economies the UK economy is highly influenced by the conditions in the global market (Ingham 2000). Still, Britain has kept its currency, meaning that it can proceed to depreciation, if necessary, in case of strong financial pressures (Ingham 2000). Such option is not available to the countries of the Euro zone, which are depended on the decisions of the European Central Bank and the relevant authorities of the European Union. Turner (1995) notes that the UK economy is quite flexible. Between ‘1920s and 1950s’ (Turner 1995, p.122) the UK economy has been transformed. Instead of being depended only on ‘traditional industries, such as textile’ (Turner 1995, p.122) the UK economy started to focus on ‘mass production industries’ (Turner 1995, p.122). From 1950s to 1970s a swift of the UK economy towards engineering has been reported (Turner 1995, p.122). From 1970s onwards, UK economy has emphasized on ‘different modes of labour, such as managerial skills and information process’ (Turner 1995, p.122). Holden, Matthews and Thompson (1995) describe the structure of UK economy in 1991. In the specific year, the UK economy is characterized by the following trends: manufacturing represents about 1/4th of the GDP, which reaches the ‘£497,001m’ (Holden, Matthews and Thompson 1995, p.67). Banking and finance is the second important part of GDP, reaching the ‘£88179m’ (Holden, Matthews and Thompson 1995, p.67). Graph 1 below shows the key, three, sectors of Britain’s GDP, as estimated for 2009. It is clear that ‘the service industry dominates the UK economy’ (Economy Watch 2010) while the role of agriculture in enhancing the national economy is quite limited. Graph 1 – England’s GDP by sector (Economy Watch 2010) According to a report published by the British Parliament, the structure of the UK economy should be further changed in the future in order to support sustainability. In the above report it is made clear that ‘by 2050 the carbon dioxide emissions in UK should be reduced at least by 50%’ (British Parliament 2007, p.31). This means that the structure of the UK economy should be changed supporting the particular effort. In Graph 2, the current and the future performance of Britain’s GDP is presented. The Graph incorporates the estimations for the prospects of Britain’s GDP as developed by the Bank of England. The specific graph reveals two facts: in 2008 Britain’s GDP was significantly reduced, probably under the influence of the global financial crisis. Moreover, for the years 2012 up to 2015 there is no accurate provision for the performance of Britain’s GDP. It is for this reason that the green colour, indicating the performance of GDP for the specific period, has been dispersed covering a wide area. It is implied that the exact performance of Britain’s GDP for the following three years cannot be estimated (Graph 2) Graph 2 – Britain’s GDP for 2008 to 2015 (Bank of England 2012) 2.4 Balance of payment The end of the WW2 revealed the inefficiency of Britain in terms of economic development. It seems that the participation of Britain in the war has caused to the country severe economic pressures (Floyd and McCloskey 1994). Indeed, since the end of the war and until 1970 Britain had to face continuous problems in regard to its balance of payments. The appearance of the ‘North Sea oil in 1970’ (Floyd and McCloskey 1994, p.36) helped to country to face these problems effectively. According to a recent release of the UK National Statistics Online, for the first quarter of 2012, an increase has been reported in regard to ‘UK’s account deficit and trade deficit’ (UK National Statistics Online 2012); the former has reached the ‘£11.2 billion’ (UK National Statistics Online 2012) while the latter has been estimated to ‘£7.8 billion’ (UK National Statistics Online 2012). In terms of inward investment, the performance of UK economy can be characterized as rather satisfactory. For the first quarter of 2012, the inward investment has been estimated to ‘£1.7 billion’ (UK National Statistics Online 2012). The balance of payment in Britain can be made clear through the Graph 3 below. In the particular graph the country’s imports and exports in regard to goods and services are presented and compared to GDP. The period covered is extensive, from 1980-2009. In this way, the potentials of Britain in regard to its balance of payments in the future can be also estimated. Graph 3 – Imports and exports of goods and services in Britain/ GDP (source: Department for Business, Innovation & Skills, p.4) 2.5 Exchange rate The level of exchange rate in Britain has been negatively influenced by the crisis of 2007-2008. In Graph 4 below, the fluctuations of exchange rate in Britain for the years 1990 up to 2010 is presented. It is clear that the crisis of 2007/2008 severely affected the British pound. In fact, it seems that ‘since its depreciation in 2008’ (Department for Business, Innovation & Skills 2011, p.6) the British pound has not managed to recover. For the near future, no differentiation can be expected in regard to the level of exchange rate in Britain. Even if the country is not a member of the Euro zone, still it cannot avoid the effects of the external financial pressures, referring not only to the global market but also to the European market. Graph 4 – Exchange rate fluctuations in Britain, from 1990 to 2010 (Source: Department for Business, Innovation & Skills, p.6) In a report published by the Bank of England in 2011 the key aims of exchange rate policies is made clear. In the above report it is explained that exchange rate mechanisms aim ‘to link monetary policy and inflation in one country with that of another’ (Bank of England 2011, online report). In 1980s the exchange rate of British pound had been set as follows: ‘three Deutsche Marks to the pound (DM3 = £1)’ (Bank of England 2011, online report). However, in 1990 Britain had to face pressures for entering the European Exchange Rate Mechanism, EERM (Bank of England 2011, online report). Britain decided to take this risk in order to support its European allies. However, soon it was proved that this decision was incorrect. In 1992 the country left the EERM (Bank of England 2011, online report). Since then, no progress has been reported in regard to the return of Britain to the above mechanism. 2.6 Hedging Hedge funds can highly influence the performance of markets internationally. In 2007, the value of ‘hedge funds under management globally was estimated to $2 trillion’ (Quaglia 2009, p.2). Hedge funds have been related to many financial crises worldwide. In 1992, hedge funds led to the important depreciation of the British pound (Quaglia 2009). In 1997, hedge funds were involved in the Asian financial crisis (Quaglia 2009, p.2). Therefore, the relationship between an economy and the hedge funds is important in order to understand the status of the economy and the risks that it could face in the future. In July 2012 one of UK’s major banks, Barclays, was found to be involved in the ‘selling of dodgy hedging products’ (UK Bubble UK Economy 2012 online report). This fact indicates the need for the development of a mechanism checking the quality of hedge funds available in the UK market, as long as Britain does not align its economic policies with those of the European Union. In a report published in 2012, the Alternative Investment Management Association notes that hedge funds have become for the first time the key part of investment, increasing their performance above ‘traditional asset classes such as equities and bonds’ (AIMA 2012, online report). It is also noted that in terms of performance of hedge funds, the UK economy is considered as quite powerful. The level of return of hedge funds in UK has been estimated to ‘4.19% annually between 1994 and 2011’ (AIMA 2012, online report). 3. Conclusion According to the issues discussed above, the UK economy is strongly differentiated from the economies of other members of the European Union. First, in Britain the control over the banks is increased, compared to other European countries, a view that is based on the following fact: in Britain, there is no issue of extreme increase of banks’ debt compared to GDP, like in the cases of France and Germany, as explained in section 2.2 above. At the same time, the British pound has been already depreciated because of the financial crisis of 2007-2008, as analysed in section 2.5. A further depreciation of the British pound would cause severe and long-term damages to the country’s economy. At the same time, the UK economy has been proved as quite flexible. The economies of most member states are not flexible, being over-depended on banks. UK has been mainly based on manufacturing and the services sectors while the banking/ finance sector has only a supportive role, as for example: to offer the funds required for the development of innovative strategies in the information management sector. Finally, UK has the key role in the management of hedge funds in the European Union. This means that the country can influence the global market and secure the stability of its economy even during periods of severe crises. The participation of Britain in the Euro zone would therefore harm the country. For this reason, it should be noted that Britain was right to stay out of the Euro. References Alternative Investment Management Association, AIMA, 2012. Hedge funds have significantly outperformed equities, bonds and commodities over the past 17 years. [online]. 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[online] Available at http://www.economywatch.com/world_economy/england/structure-of-economy.html [Accessed 19 July 2012] Europa, 2012. The history of the European Union. [online]. Available at < http://europa.eu/about-eu/eu-history/index_en.htm> [Accessed 19 July 2012] Floyd, R. and McCloskey, D., 1994. The Economic History of Britain Since 1700, Volume 3. Cambridge: Cambridge University Press. Holden, K., Matthews, K. and Thompson, J., 1995. The UK Economy Today. Manchester: Manchester University Press ND. Ingham, G., 2000. Managing Change: A Guide to British Economic Policy. Manchester: Manchester University Press. Muntigl, P., Weiss, G. and Wodak, R., 2000. European Union Discourses on Un/employment: An Interdisciplinary Approach to Employment, Policy-making and Organizational Change. Amsterdam: John Benjamins Publishing Company. Parliament: House of Commons, 2007. The structure of government and the challenge of climate change: ninth report of session 2006-07, report, together with formal minutes, oral and written evidence. London: The Stationery Office. Quaglia, L., 2009. The ‘old’ and ‘new’ political economy of hedge funds regulation in the EU. UACES Conference in Angers, September 2009 [online]. Available at http://www.uaces.org/pdf/papers/0901/quaglia.pdf [Accessed 19 July 2012] Turner, R., 1995. The British Economy in Transition: From the Old to the New? London: Routledge. UK National Statistics Online. Release: United Kingdom Balance of Payments, The Pink Book, 2011. [online]. Available at http://www.ons.gov.uk/ons/rel/bop/united-kingdom-balance-of-payments/2011/bod-pink-book-2011.pdf [Accessed 19 July 2012]. UK Bubble UK Economy. 2012. Barclays caught selling dodgy hedging products to small firms. [online]. Available at [Accessed 19 July 2012] Vural, I., 2011. Converging Europe: Transformation of Social Policy in the Enlarged European Union and in Turkey. Aldershot: Ashgate Publishing, Ltd. Welfens, P., 2001. European Monetary Union and Exchange Rate Dynamics: New Approaches and Application to the Euro. New York: Springer. Read More