The Economy and it's Effect on Politics - Essay Example

The Economy and it's Effect on Politics By Lisa Haddon 28th November 2008 INTRODUCTION. Adam Smith defined political economy as a 'branch of the science of a statesman or legislator' concerned with the twofold objective of 'providing a plentiful revenue or subsistence for the people and supplying the state or commonwealth with a revenue sufficient for the public service. It proposes to enrich both the people and the sovereign' (Smith, 2000). Politics and economics are intertwined, both disciplines influence each other on national and global stages and actions in both disciplines have consequences for the other as will be shown.

The existence of the EU is the result of desire to create a European common market, where trade barriers are removed and hence promote economic activities between political member states whilst becoming a united political entity on the world stage.THE EUROZONEFive economic tests were set out to determine whether the UK's economy was ready for such a change, 1) Convergence with the Euro zone; 2) Flexibility to adapt; 3) Impact on jobs and economic growth; 4) Impact on the financial services sector; and 5) Impact on investment (BBC, 2003).

Two of these tests will be discussed in this essay. The Bank of England currently sets the interest rate for the UK but convergence means that power will be transferred to the European Central Bank (ECB). The UK's economy would have to be in sync with the rest of the Euro zone to avoid stresses on the domestic economy, for example The UK's mortgages are unlike the majority of Euro mortgages as they are in general variable rate mortgages, the UK has the highest property owner occupation than any other European country so is sensitive to interest rate changes.

There are political and economic consequences to this sensitivity for example mortgage borrowers show unenthusiastic attitude to their political peers concerning joining the Euro zone precisely because of this and convergence would bear consequence on the economy as there would be a reduced spending power of these borrowers. Joining a single currency would mean that the UK would have to abide by decisions that may not be compatible economically set by the ECB, this in turn would lead to a strain on the domestic economy.

This leads to the second test of flexibility. The UK would have to be able to be flexible and adapt to the incompatibilities. However this again leans to the housing market as whilst a single economy would possibly leave the UK in a strong competitive advantage in a single market due to its labor market being far more liberalized than many of the EU member states, the housing market does not have the flexibility to change. The interest rate dictated by the ECB is incompatible with UK mortgages and borrowers.

Until the behavior of the UK housing market changes then the country will not have the flexibility to grow in the Euro single currency system. CONCLUSIONWhilst the UK remains Europe's highest home owning nation politics will be received negatively should the economic decision to join the Euro zone become a reality. A single interest rate set by what Britons view as outsiders would have dire consequences on the UK's economy and any such policy would be received with political consequences. Adam Smiths definition of a political economy could not be sustained within the nation state until all five tests can be completed satisfactorily to meet the needs of citizens and the political environment.

BIBLIOGRAPHY Smith, Adam; Reich, Robert (intro) 2000 The Wealth of Nations (Eds, Cannan, Edwin) Published by Modern Library UK 'not ready' for euro http://news.bbc.co.uk/2/hi/uk_news/politics/3029135.stm (accessed 28th November 2008)