The Reasons Why Britain Should Remain in the European Union - Dissertation Example

? of registration number) This is a policy paper to the British citizens and the British prime minister. It is required to explore the reasons why Britain should remain in the European Union. This is set on the backdrop of the current economic state of the EU which has not recovered completely (Gonzalez, 2012). It also seeks to address the current opinion polls which are showing more and more people voting for Britain to leave the European Union. It showed a populous poll of 52% of the British citizens wanting to leave, 26% disagreed and 22% didn’t know, the vote for wanting to leave has increased primarily due to the European Union Crisis (The Times, 2012). This paper therefore seeks to help Britain in coming up with a valid decision as to whether they should leave the EU or stay. It will therefore address the current economic climate of the EU and bring out in an unbiased way the good and the bad. It will also look at the improvements in the EU economy in the later years, and come up with a conclusion on the future of the European Union. It is therefore left upon Britain to make a decision whether to stay or leave. Improvement of the European Union situation through the joining of successor states The European Union has grown hugely since the 27 countries joined. It has become a major trading block with a GDP higher than the USA. The GDP in 2012 was 12.894 trillion euros as compared to the USA which had a GDP of 16.566 trillion dollars. This was achieved when twelve new countries joined in 2004 and 2007. The union is now seeking to sustain economic growth by investing in research energy transport and to reduce further environmental impacts on the European economy (Europa, 2012) Due to the enlargement of the European Union and the countries joining the European Monetary Union it has currently become the world’s largest exporter and the second largest importer. It enables and is responsible for 20% the world exports and imports. The EU currently accounts for two thirds of the EU trading since EU trades among the EU countries. Apart from EU other trading partners are USA and China. The United States is EU’s largest trader followed by China. Despite these achievements EU’s unemployment through the years has increased which now stands at 12% (Orlandi, 2012). Over the years employment in agriculture and industry has reduced while employment has increased in the service and commercial sectors. Infrastructure in the EU is at good standards and it is at per with other first world countries. Road is the main means of transport with three quarters goods and people transported through EU’s roads. Research and development is also one of the main things that EU majorly invests in, this is a strategy to make it more competitive. The investment in research and development is not at per with US and Japan but the EU intends to do bring it at per. The EU depends on imports for more than 50% of its energy needs. It is trying to use energy more efficiently and is striving to use renewable energy for 20% of its energy needs by 2020. Some of the energy needs it’s going to use include wind, sun (Europa, 2013). The EU has been facing a recession like the rest of the world but now it is surely and slowly coming out of it. This is especially seen in its financial markets where risk premia has decreased especially for sovereigns and banks (Mody, 2012). This year has also seen investors regaining confidence in the integrity of the euro. The EU and its member states have also seen to reign in public debt to a sustainable level and have put up post adjustment strategies to enable constructive adjustments of the various economic sectors (Cuerpo, 2013). The combination of weak public finances, fragile banks and poor macroeconomic policies that had riddled the first half of 2012 have been dealt with. They are now at a better position that in 2012. This changes although cannot be witnessed in the short term, but some changes can be seen. The EU has also tried to shift resources from sectors that had not grown sustainably in the pre-crisis period to areas that will assure continued economic growth. There is still uncertainties in the macro-financial situation of the EU this has discouraged firms and household from spending. This situation has transmitted vulnerability to Member States of the EU and to the rest of the euro area (Kose, 2012). The Current state of the EU economy the good and the bad In the past recent months the financial markets of the EU have had some significant improvements. Despite this the EU is still plagued by balance-sheet recession with adverse financing conditions that has reduced public and private leverage and has increased unemployment. Therefore the transmission to the real economy will be slow. Real GDP in the EU has reduced by 0.5% during the final quarter of 2012 while the euro area went further into recession and contracted by 0.6%. Latest findings have shown that the EU and the euro area are both bottoming out at the beginning of this year. The EU has also faced a disparity in that financial market conditions contrasts visibly with weaknesses of the real economy. The growth differentials between the Member States are also huge (Dieppe, 2012). The EU has implemented policies that have brought fragile improvement in financial market conditions. Since the summer of 2012 the stress on the financial markets has eased up a lot after aggressive and substantive policy actions. The reforms include fiscal and structural reforms at member state level; this has been accompanied by all Member States entering into the European Stability Mechanism (ESM). The European Central Bank announced an introduction to a new asset purchase program which is conditional for making outright monetary transactions in secondary markets for sovereign bonds. The EU has also adopted a second separate program for Greece which will deal with economic problems that Greece faces. The European Council made a decision on the Single Supervisory Mechanism which is a further step leading to a banking union. This has led to alleviating stress in sovereign funding, easing tensions in financial markets and dealing with negative feedback from strategies which have increased sovereign-debt. (Baker, 2013). According to Stockman (2004) however, financing conditions of the private sector has wide disparities. Uncertainties in economic prospects have also remained high. Confidence in the non-financial sector has also very recently started improving at a very slow pace (Ruscher, 2012). Despite increased confidence in the financial markets the economic situation has continued to deteriorate toward the end of 2012. There is a need of huge internal and external rebalancing needs that are required after a deep debt recession. A strong rebound of domestic demand is not expected (FRBS, 2012). The improvement of the financial market has not yet impacted on the credit growth which is still characterized by low demand and strict bank lending conditions to non-financial corporations and households. Uncertainty has not significantly reduced; this has had a huge impact on reduction on domestic demand. This is characterized by households and corporation reducing on expenditure, investing and employing. This has clearly led to the double decrease of domestic demand (FRBS, 2013). EU unemployment Eurostat has reported a record high of unemployment, which now stands at 12% in February after a January revision. This is the highest the unemployment has been in the European Union. Some of the countries where unemployment has increased hugely include Spain, Portugal, Cyprus and Greece (Bertola, 2012). The youth unemployment in Euro area has increased consecutively in the last 22 months. Youth unemployment is now at 23.9% from 22.3% a year ago. Unemployment is curbed by expenditure on research and development and investing in technology. Many scholars have been able to find a relationship between employment and increase in research and development expenditure. Innovation is therefore seen as directly related to employment. Some proxies like technological development have been found to have a positive relationship with unemployment (Addison , 2001). Most countries in the EU are not investing enough in R&D since they do not want to increase their public debt. Although studies have shown that increasing of public debt so as to spend on innovation and research and development has a positive effect to the country in the long through increase in unemployment leading to the EU countries spending less and less in R&D (Stockman, 2001). Most EU countries now choose non-optimal debt policies so as to reduce budget deficit (Corsetti et al, 2010). Public debt is still a complex issue no matter how one tries to look at it. The current pressure on EU countries to reduce their public debt in the short run should be assed for its accuracy. Since this might lead to negative effects especially in increased unemployment. Antonucci (2002) emphasizes that macroeconomic constraints of the Economic and Monetary Union in Europe have put a lot of limits on the EU’s economic dynamics of national economies and in manufacturing industries. According to Stockman (2004) a country should be allowed to borrow since this can provide a buffer to the economy which leads to less distortion in taxes resulting to increased economic welfare. It has also been found out those guidelines of the Monetary European Union in the Maastricht treatise has led to major deterioration in the economic system and countries structure between 2007 and 2010. European policy makers should be therefore aware that increase in expenditure in research and development leads to an increase in employment (Room, 2005). As governments calculate gross debt /GDP at current prices, focusing only on the reduction of public debt instead of both reduction of public debt and growth of the gross domestic product can lead to increased waste expenditure. Myopic policies which only look the public debt aspect of the ratio lead to higher taxes and public service cuts. This will lead to reduced economic stability in the long run leading to worse wellbeing of the economy (Orlandi, 2012) In order to increase employment growth the EU needs to design an effective and efficient long-run system. This system should consider all structural indicators, to allow the economy to slowly reduce public debt without creating a shock in the economic patterns and employment in the countries (Aizeman, 2013). Findings from various analyses have shown that restrictions of debt and other macroeconomic factors are unclear. If a country is not able to incur debt then it will not have enough money to invest in R&D hence it won’t be able to create employment. EU debt in the member states Europe's Web of Debt | Bill Marsh, the New York Times, 2010 This diagram clearly depicts the current state of the debt in the weakest economies in the European Union (Reinhart, 2009). It also shows their interconnection. Therefore the problems of one country affect other countries. This as shown by the diagram will lead to the biggest losers being France and Germany. Therefore the EU should implement tight policies to deal with these countries especially Greek, Spain and Portugal to prevent a future crisis from occurring again (Gerlach, 2010). Current state of the EU economy The EU economy has recovered significantly on the recent months after the great depression. Some parts of the EU are still under balances sheet recession. This has created adverse financing conditions to both public and private sectors and the transmission of improvement has been slow to the economy, GDP in EU contracted by 0.5% in the final quarter of 2012 (Buti, 2012). This has therefore allowed the decline of financial policy uncertainty in the last few months. Although uncertainty in line with economy are still at high levels while financing conditions of the private sector still vary widely among the EU member states (Baker, 2012). Confidence in the non-financial sector has only just recently picked up in the EU. Despite these positive improvements in confidence in the EU economy, the economic situation has further deteriorated at the end of 2012 (Furceri, 2012). The future doesn’t look so bright either as there are a lot of internal and external rebalancing needs which is typically caused by deep debt crisis which all the world economies four years ago (Kose, 2012). This usually requires balance-sheet recessions; therefore a strong reduction in domestic demand will not be unexpected. This also explains why the improvements in the financial market situation have not impacted on the credit growth which is still characterized by low demand in households and non-financial corporations. This has led to strict bank lending conditions to households and non-financial corporations (Jorda, 2012). Uncertainty in the economic condition also has a strong impact on expenditure of households and corporations, which are now cutting down their demand. This combination is clearly reflected by a double dip in demand (Leduc, 2012) Forecasts in 2014 show that some of the problems that are afflicting the EU at the moment for example low demand and balance sheet recession will reduce in 2014. Overall GDP is set to grow at a level of one and half percent in 2014. Import and Exports in the EU Exports have been stabilizing GDP growth in 2012 this is meant to further continue supporting in 2013. In January export orders in the EU manufacturing sector has increased although not as the normal level but it is at an ultimate 18-month-high. Also the European Commission also reported on a survey that indicates that mangers of manufacturing sector are more optimistic of the export volumes for the first quarter of 2013. Competitive gains have been achieved due to the enlargement of the EU in 2004/2007 and predicted gradual improvements in global activity and trade should increase growth in the course of 2013. During this year exports are expected to grow by two and a half in the EU (Dieppe et al, 2012) Imports are still at a low level due to cyclical weak demand in the EU therefore import growth is expected at a lower level. Consumption levels in Member States will also remain low for structural reasons as since private households have had to reduce their debt burden. Imports are expected to grow in 2013 at one and a half percent growth in 2013. This will be helped by a slow increase in demand in the last quarter of this year. In 2014, imports will be expected to grow by four and three quarters percent. With increase in imports growth exports will decrease with improvements with imports (ECB, 2012). Investment in the EU There has been decreased private investment in the EU since 2011 and has continued all through the third quarter of 2012. Low overall demand, low capacity utilization rates and low corporate operating profitability have weighed on capital spending (Buca, 2012). Weak business environment caused by uncertainty and financial constraints in some member states has led to a decline in expansion of business. Investment further decreased in the last quarter of 2012 (Buca, 2012). There is also deleveraging needs among most non-financial corporations with high corporate debt-to-GDP ratios remain substantial in several Member States (Strupczewski, 2013). This has had negative net credit flows which are bad for investing as most internal funds will be used for debt repayment instead of investing (Gerlach, 2010). Capital expenditure in vulnerable countries is weak because of structural factors. Forecasts though indicate that investment in equipment will pick up in the second half of 2013. Since there has been increased confidence albeit at a very low level in improved domestic and external demand prospects which is likely to increase capital spending. Hence there will be realization of the investment projects that keep on being postponed will finally get done (Gilchrist, 2010). Investment in construction has also continued to reducing in the third quarter of 2012. There have been ongoing adjustments in housing markets in the EU as indicated in the Eurostat. This continues to reduce residential investment and leading indicators such as building permits do not show any signs of improvements. It is expected to continue declining in the EU during 2013. It is although expected to bottom out of the downward housing adjustment in 2014, and is therefore will be able to pick up again on both areas. Contractions will still continue in countries that are facing the fiercest housing market conditions like Spain. The government is still going to make some cuts in construction investment in 2013 but is predicted to increase moderately in 2014. In 2013 overall capital spending is set to decline by 1% in the EU and expected to increase by two and three quarter percent in 2014 (Panousi, 2012). Future of the European Union The European Union still has a bright future. It has the advantage of being the World largest trader. The joining of the twelve member states that occurred in 2004/2007 has increased the market available for the industries in the European Union and has made it have the highest GDP in the world compared to the United States of America. The EU economy has been improving especially during this year. It has been at a down trend after the Great depression but is now recovering slowly but surely (DGECFIN, 2011). Most of the economic aspects are set to make a full recovery at 2014 apart from the countries that are still under major crisis and constraints in the European Union. The European Union has set up important policies that are going to curb the current economic turmoil’s like balance sheet recession which is facing the European Union (Reinhart, 2009). The European Union is definitely a large force to reckon with in the world economies. It is coming out of the deep end of the Great Recession which had hit the whole world and did not spare the European Countries (Bario, 2013). The fining of countries that do not work on their economies is also a good move which will make sure that all countries work on their economies hence no economies should lag behind. So far the European Union is doing well with the exception of a few countries mentioned above like France, Spain, Slovenia and Italy these countries are currently dealing with their problems and will therefore get them figured out with time (Dieppe et al, 2012) Conclusion Therefore Britain should consider all this factors before deciding to leave the European Union. It is safe to assume that EU economy is in a trend to improve its economic hardships (Melander, 2012). The EU policy makers should although watch on policies to decrease public debt without actually decreasing the GDP since the governments will stop investing and allocating money to key sectors of the economy leading to problems in the future. References Addison JT, Teixeira P (2001). Technology, Employment and Wages, Labor 15(2):191-219. Antonucci T, Pianta M (2002), Employment Effects of Product and Process Innovation in Europe, Int. Rev. Appl. Econ. 16(3):295-307. Baker, S. R., N. Bloom and S. J. Davis, January (2013) “Measuring economic policy uncertainty”, Stanford University Working Paper Buca, A. and P. Vermeulen, May (2012) “Corporate investment and bank-dependent borrowers during the recent financial crisis”, Paper presented in the ECB workshop Buti, M., and A. Turrini, November (2012), Slow but Steady? Achievements and shortcomings of competitive disinflation within the euro area, ECFIN Economic Brief no. 16 Dieppe, A. et al., “Competitiveness and external imbalances within the euro area”, ECB Occasional Paper, No. 139, December 2012 ECB, November (2012) Survey on the access to finance of small and medium-sized enterprises in the euro area, Europa (2013) website, European Union Economy, http://europa.eu/index_en.htm, retrieved April 26th 2013 European Commission (2013), European winter 2013 forecasts, European Union, retrieved April 26th 2013 Bristo Corsetti G, Kuester K, Meier A, Muller G (2010), Debt Consolidation and Fiscal Stabilization of Deep Recessions, Am. Econ, Rev, 100(2):41-45 Gerlach, S. et al. (2010), “Banking and Sovereign Spreads So High?” IMF’s Global Financial Stability Report, Gilchrist, S., Sim, J. and E. Zakrajsek, September (2010) Uncertainty, financial frictions, and investment dynamics, Working Paper, Jorda, O., M. Schularick and A. M. Taylor, October (2012) “When credit bites back: Leverage, Business cycles, and crises”, Federal Reserve Bank of San Francisco Working Paper, No. 2011-27 Knoteck, E. S. and S. Khan, (2011) “How do households responds to uncertainty shocks”, Economic Review, Federal Reserve Bank of Kansas City, Second Quarter 2011, pp.63-92 Kose, M. A. and M.E. Terrones, October (2012) “How does Uncertainty affect performance/”, IMF World Economic Outlook, 49-43 Ludec, S. and Z. Liu, March (2012), “Uncertainty shocks are aggregate demand shocks”, Federal Reserve Bank of San Francisco Working Paper, No. 2012-10 Panousi, V. and D. Papanikolaou, June (2012) Investment, idiosyncratic risk, and ownership, Journal of Finance, Vol. 67, No. 3, pp.1113-1148 Room G (2005). The European Challenge: Innovation, Policy Learning and Social Cohesion in the New Knowledge Economy, The Policy Press, Ruscher, E. and G. Wolff, February (2012) Corporate balance sheet adjustment: stylized facts, causes, and consequences, DG ECFIN Economic Papers no. 449, Stockman DR (2010). Balanced-Budget Rules: Chaos and Deterministic Sunspots, J. Econ. Theory 145(3):1060-1085. Strupczewski Jan, April (2013), the European Commission press release, Reuters, http://www.reuters.com/, Retrieved April 26th 2013 Gonzalez Cabanillas, L. and A. Terzi, December (2012) The accuracy of the European Commision’s forecasts re-examined, European Economy Economic Papers (DG ECFIN), No. 476 Melander, A., Sismandis, S. and D. Grenouilleau, December (2012), The track record of Commission’s forecasts- an update, European Economy Economic Papers (DC ECFIN), European Commission (DG ECFIN), European Economic Forecast- Spring 2011 Reinhart, C. M. and K. S. Rogoff, (2009), This time is different: eight countries of financial folly, Princeton University Press. Furceri, D. and A. Zdzienicka, (2012), How costly are debt crises? Journal of International Money and Finance, June 2012, Vol. 31, No. 4, pp. 726-742. Mody, A. and D. Sandri, April (2012), The Eurozone crisis: how banks and sovereigns came to be joined at the hip, Economic Policy, Vol. 27, No. 70, pp. 199-230 Bertola, G. et al, Price, wage and employment response to shocks: evidence from the WDN survey, Labour Economics, October 2012, Vol. 19, No. 5, pp. 783-791 Populus poll, 11 June 2012 - The Times Cuerpo, C. et al., April (2013) Indebtedness, deleveraging dynamics and macroeconomic adjustment, European Economy, Economic Papers, No. 477, Aizenman, J., B. Pinto and V. Sushko, April (2013), Financial sector ups and downs and the real economy: Up by the stairs, down by the parachute, BIS Working Papers, No. 411, Orlandi, F., May (2012) Structural unemployment and its determinants in the EU countries, European Economy Economic Papers (DG ECFIN), No. 455, Borio, C., Disyatat, P. and M. Juselius, February (2013) Rethinking potential output: embedding information about the financial cycle, BIS Working Papers No. 404, Read More