International Financial ManagementWill the United Kingdom join the EURO club ? PRESENTED BY: CHARU MUNDRA
The United Kingdom & the EU (the Single Currency)ABSTRACT:a) Why did not the UK join the Single Currency?b) What advantages and disadvantages of the UK joining the single currency?c) Actual news & opinions about a membership in the single currency.Conclusion
The United Kingdom & the EU(the Single Currency) Introduction On 2nd May 1998 the European Commission in Brussels decided the membership of 11 EU-countries to the Euro- Launching on 1st Jan. 1999. The Euro-11-Zone includes: 300 million people 19,4% of the World-GDP 18,6% of the World-Trade
A) Why didn’t the UK join the single currency?1) The convergence criteria • An inflation rate that is no more than 1.5 % higher term than the average of the three lowest inflation rates. • A long term interest rate that is no more than 2% higher than the three lowest interest rates.
• A government budget deficit that is no higher than3% of GDP.• And government debt that is no higher than 60% of GDP.
Arguments for UK entry into single currency• Lower transaction costs• Increased trade and investments• Lower inflation and long term interest rates• Political influences
B) What advantages anddisadvantages of the UK joining the single currency?
1) Economic consequences of the UK opting outi) Disadvantages of opting out • The country, like other outsiders, will be very much affected by the policies adopted by the EMU members. • All decisions which relate to monetary and exchange rate policy will be to reflect primarily the interests of the EMU participants. • Its trading partners would dominate decision-making in key areas of EU policy.
• These partners would acquired a competitiveadvantage as a result of EMU’s success.• The gain in competitiveness of the EMU group would,other things being equal, be equivalent to a loss ofcompetitiveness among the countries outside.Then, it will leadto : • Higher risk premium on interest rates • Greater exchange rate volatility Lower rates of investment and growth Higher unemployment and strains on government finances.
ii) Benefits of opting out :• The UK, like other “outs”, will be shielded from thecounter-cyclical fiscal policy instability.•It will also be spared the inevitable political frictionswhich will arise in the process of adjustment to a singlemonetary policy.
2) Consequences of the UK joining(in short or long term).i) Costs or disadvantages of joining • Total costs for a business = £ 20 m • costs from strategic changes to maximise the busines competitiveness in the new Euro-zone environment. Costs in changing their systems in order to trade in Euro Costs of transferring their base accounting systems to the Euro
• No transition period for the UK• Cost of the loss of independence in interest ratedecisions• The UK, due to being a long-term Outsider, would beunlikely to have any serious influence on measuresadopted by the EMU members.
Principle Advantages for the 11members of the Euro-zone• The domestic market needs a single currency i.e.: currency crises in autumn 92/summer 93• Retirement of operation costs• Long-term economic stability• No exchange rate losses for companies i.e.: Germany lives up to 60 % from EU export• Abolition of barriers to a single European market• Price transparency
ii) Advantages of joining• Increased competition• 11-Euro-zone Countries = save 0.3 - 0.4 % of EU GDP p.a. (transaction costs). The UK = only 0.2 % of EU GDP p.a., because the UK trade with other EU countries is below average.• Greater specialisation and trade within the Euro-zone• Euro will bring more integrated European financialmarkets. Cqs : Higher growth in the Euro-zone
c) Actual news & opinionsabout a membership in the single currency.
How could UK join the s.c.?The Government’s National Changeover Plan shows thatTony Blair aims to speed up the process. The UK canprepare more quickly than the first wave entrants managed.Treasury sources are making clear• no decision until after the next election• the document gives the green light to speed up its preparations• that a decision could be made as late 2001, with Britain possibly joining economic and monetary union by 2003
Britain could switch to Euro in 40 monthsDecision Referendum UK Joins Euro Cash End 4 months 24-30 months 6 months 40 months