WILL THE UK JOIN THE EURO CLUB ? GLORIVEE CRUZ RICHA ARORA
Brief History of the EU• 1957: European Economic Community (EEC)• 1979: European Monetary System (EMS)• 1991: Maastricht European Council• 1999: European Monetary Union (EMU)• 2002: Euro – the official currency used by euro-zone countries• European Central Bank (ECB)
The purpose of ‘Single’ currency• Integrate the national financial markets.• Higher efficiency in the allocation of capital in Europe.• Countries could no longer devalue their currencies against another.• Strengthen European Identity.• Making Euro the second most important reserve currency after US Dollar.
The UK & EU• History: – 1973: UK joined the EEC – 1979: EMS managed through ERM – 1992: Black Wednesday• Politics: – Eurosceptic – Europhiles – Public opinion – growing opposition towards adopting the euro
The UK & EU• Politics: – 5 Convergence criteria: –What is Price stability Sound public Sustainable public Durability of Exchange ratemeasured? finances finances convergence stabilityHow it’s Consumer price Government Government debt Long-term interest Deviation form ameasured? inflation rate deficit as % of GDP % as of GDP rate central rateConvergence No more than 1.5 Reference value: Reference value: Not more than 2% Participation incriteria % points above the not more than 3% Not more than points above rate ERM II for at leas 2 three best 60% of threes best years without performing performing sever tension members member states in price stability – Integration and UK’s political statues in Europe: • Seat/vote on the board of ECB • Relinquish control of monetary policy to ECB • Weakened political independence
The UK & EU• Economy: UK’s economy differs from euro-zone members – 1998: • Unemployment rate: 6.2% UK, EU averaged 10% • Public spending (of GDP): 40% UK, 54% France, 50% Italy, & 47% Germany • Gross public debt (of GDP): 53% UK, 122% in Italy, 61% in Germany, and58% in France – 2010-2011: • Unemployment has increased at a range between 8-10% • Debt problems: UK, the largest BCA balance account deficit, over 10% of GDP • Total debt has reached 61% of GDP and is expected to reach 71% in 2013
The UK & Euro Club• Pros: – Reduced transaction costs – Elimination of exchange rate uncertainty – Capital market development – Political Union• Cons: – Loss of independence over economic policy – Constraints over fiscal policy – ECB effective/efficient control over the EU
Greek Default- Europe’s Lehman Moment• Greece & Italy, masked their deficit and debt levels.• High levels of tax-evasion.• Early 2010, excessive national debt.• European govt. bonds lost value.• $115 billion bailout in 2010, by the European Central Bank.• S&P’s slashed Greece’s debt rating to BB+ (junk status) and further downgraded it to CCC (lowest in the world, June 2011)
How safe is UK from the crises? Britain was skeptical about the run up to the launch of the euro. So, they didn’t join it.• Any associated disruption to bank funding markets could spill over to UK banks.• Huge exposure in the Europe financial market.• UK at risk from a domino-fall of defaults.
Greek Debt Crises- Impacts on UK & US Huge pressure on UK’s Balance Sheet-• UK has around $14.7bn (£9.1bn) in exposure to Greek debt.• $136.6bn to Irish debt,(8 times its Greek exposure) and $100bn of Spanish exposure.• Euro-zone accounts for 40% of UK exports. (BBC News) Possible effects on US economy-• Hurt US exports in Europe.• Steep losses in the US financial market.• Cut back lending by banks.
The EU on life support• Europe has no national Treasury, which could force individual countries to bail out their own banks.• Belgium has not had a govt. in almost a year.• A default by Greece would raise its prospect of leaving the euro and returning to its former currency.• Portugal facing large austerity challenges.• High interest rates & taxes to pay higher cost of borrowing.
Will UK ever join the Euro?• United Kingdom redesigned most of its coinage in 2008.• Pound has been trading at a competitive level in global currency markets. (2009-10)• No intentions to give up the ability to control interest rates.• About 70% of the British population is against joining Euro.• Keeping in mind the current scenario- UK made a smart decision by NOT being a part of the Euro Zone.