After the Second World War Europe was really devastated economically and politically and created a deep divide among the people. In general election of 2001 in United Kingdom discussed about its future participation in the European Monetary Union paying attention on issues concerning to the loss of political identity and national sovereignty. The Labour party stranded neutral wait and see policy and strong anti-euro policy by conservative party. The business community of United Kingdom such as Confederation of British Industry also expressed their attitude towards euro zone membership.
EUROPEAN UNION
In 1950 the six European countries Belgium, Germany, France, Italy the Netherland and Luxemburg began to join for secure peace. Then the nations took away the excise and custom duty and made a better business relation between each other. In 1973 the countries like United Kingdom, Ireland and the Denmark joined in European Union. Then in 1980 Spain, Portugal and Greek joined in European Union. In 1989 the west and East Germany were decided to join and form united Germany. The collapse of communism across the Europe results to reduce the distance between eastern and central Europe. The emerging of single market for four freedom, they were a movement of services, goods, money and people. In 1995 three new countries, Austria,Sweden and Finland were joined in European Union and they decided to open their boarders for exiting and entering the citizens of European Union without passport checking. Because of the development of new technology like internet and mobile phone, and many students came to Union countries for their higher education. Now Euro is the common currency of many European nations. These time every part of world faced problem with terrorists and the European Union countries took more precautions to prevent that .And in 2004 European Union is developed with ten new members.
EURO
In 1992 the Maastricht treaty agreed the plan to start a new currency. It was launched as an electronic currency and used by bank only. And in 1st January 2002 the first notes and coins were issued and became legal tender in Germany, Austria, Belgium, Italy, Ireland, Luxembourg, Portugal, Netherland and Spain. And members like United Kingdom, Sweden and Denmark did not adopted. The countries like The Czech republic, Poland, Slovenia, Cyprus, Hungary, Estonia, Slovakia, Latria, Lithuania and Malta were joined in 2004 and accepted euro as their currency. Now almost 300 million people using single currency across the European Union. The European Central Bank (ESB) based in Frankfurt, Germany controls and regulates the interest rate of euro. According to the supporters of euro because of more transparency the competitiveness is increased significantly. Increased foreign investment reduces the cost of business and results price down in the shops. On other view this causes a significant increase of unemployment. One euro is divided in to 100 parts called cents. Euro notes are available in 5,10,20,50,100,500 and coins are available in 1 and 2. And cent are available in 1, 2, 5, 10, 20, and 50 cents.
From its introduction onwards euro is the second used reserve currency in the world after the United States dollar. As an international reserve currency euro increased its position from 17.9% to 26.5% from 1999 to 2008 ,at the same time the share of the United States dollar fell from 70.9% to 64% and the Japanese Yen fell to 3.3% from 6.4%. The rise status of euro as reserve currency was not gradual. It shows a 4.4% rise in 2002, it was the outcome of the launch of euro coins and notes. Now euro remains as a major reserve currency in both developed and developing countries. According to the International Monetary Fund the total amount of euro as a reserve currency in 2008 was equal to $1.1 trillion and a share of 22%.And 31% share of the currency reserve of developing economies. According to the former chairman of Federal Reserve Mr. Alan Greenspan it is clear that euro should replace the dollar as a reserve currency or would be trade as an one and the same vital reserve currency as United States dollar.
THE EUROPEAN MONETARY UNION
The single currency (euro) was introduced as a vital currency on 1999.All members of European monetary union replaced their currency in to euro. Now Euro is the official currency of 16 European countries. The key players of European monetary union are Germany, Italy, France, Spain and Netherland. The euro is managed and controlled by the German based European Central Bank and Euro system.
PERFORMANCE OF EURO AGAINST US DOLLAR
After the introduction of the single currency ,its exchange rate fells heavily against other currencies including United States dollar also. But after the launch of bank notes and coins on 1st January 2002 and the all members of European Monetary Union replaced its national currencies to euro, it starts to increase steadily. The euro surpassed the initial exchange value for first time on 23rd may 2003($1.18).And in 2004 euro achieved $1.366 against United States dollar. In 2005 it temporarily weakened against United states dollar and after November began to rise steadily. The euro achieved its all time high against United States dollar of $1.599.
U.S. dollars per 1 euro 1999-2009
Year Lowest ? Highest ?
Date Rate Date Rate
2009 05 March $1.259 02 January $1.386
2008 27 October $1.243 15 July $1.599
2007 12 January $1.286 27 November $1.487
2006 02 January $1.181 05 December $1.333
2005 15 November $1.164 03 January $1.350
2004 14 May $1.184 28 December $1.363
2003 08 January $1.032 31 December $1.263
2002 28 January $0.859 31 December $1.048
2001 06 July $0.834 05 January $0.954
2000 26 October $0.823 06 January $1.038
1999 03 December $1.002 05 January $1.179
Source: Euro exchange rates in USD, ECB
after effect of two world wars and the elimination of Ireland from the union affected the economy in a bad way. The United Kingdom is the one of the major financial power in the world. This is the sixth largest economy in the world. The economy mainly depends on service and oil production industry and less depend on agriculture. Bank of England is the national authority to set base rate and regulate the economy. United Kingdom has strong business links with many nations particularly the United States and all deal are based in United States dollars. The economy has more relation with United States than Europe. United kingdom is the biggest European investor in United states and vice versa. The current economic recession and credit crunch harshly affected the economy. The Gordon Brown government offered huge package to retain the economy which includes reduction of taxes, nationalisation of banks and so many. The Bank of England reduced the base rate from 2.5% to 0.5% which helps to reduce the banking interest rates.
ADVANTAGES OF PARTICIPATION IN EURO
1.Exchange Rate stability
If United Kingdom joining the Euro it helps to reduce the volatility of exchange rate with the main European Union trading partners .By the use of single currency results the enhancement of European single market .The single currency would decrease uncertainties and risks experienced by exporters and investors in their business dealings all over the zone. However the pound is very volatile. The pound lost almost one third of its value against the German Mark between 1989 and 2000, although it recovered. But if UK does not join in euro it will be very difficult to recover if the pound will lose more value against single currency.
2. Inward Investment
Joining the Euro results a significant increase in Inward investment. Foreign investment is one of the essential part of every economy. But last some years show a significant decrease in the foreign investment in UK. Some of the major foreign investors are expressed their interest to United Kingdom to join the euro, so if United Kingdom not joins it will lose much foreign investment. After the introduction of euro the foreign investment increased in Euro zone countries at the same time the percentage of foreign investment decreased in United Kingdom. Ireland attract more inward investment because of they are the only English speaking countries in the eurozone If United Kingdom joins they can enjoy the benefit also.
3. Economizing foreign currency reserves
More economizing of foreign currencies would beneficial to finance sector. It will be easier to perform insurance and banking sector with this single currency. It could be very easier to buy or sell German shares in the stock market of United Kingdom.
4. Low inflation
The participation in euro helps the country to make a strong framework of anti inflation.
5. Increasing value of euro
The participation of many countries in a single currency will make a great challenge for the dollar. This results an increase in the investment in participating countries and more countries move forward to take euro as their reserve currency. This trend would tend to raise the value of euro. And the participation of United Kingdom in to the Eurozone also helps the euro to increase the value.
5. Free from conversion charges
If UK joins single currency, the economy can enjoy reduced or no currency exchange charges. This will help to save a huge amount in every year. People would be able to get euro to other countries with in the European Union and this currency would be accepted.
6. Price transparency
The usage of single currency results to increase price transparency, it means a product price in European Union members is almost equal. There would not be much difference in price for a particular product in all members. So it will be very easily to compare the price of a product because of single currency.
7. Trans National Corporations
Adopting euro in UK will create more establishments of Trans National Corporations. This provides more job opportunity and increases the income and help to reduce the effect of credit crunch.
DISADVANTAGES OF UK TO JOINING EURO
On other hand participating euro is a discouraging aspect of loosing tradition, freedom and independence. If UK joins Euro the control of economy will be handed over to European Central Bank situated in Brussels. And affect the economy and economic policies like monetary, fiscal and exchange rate, all of these provide control and balance and with in the economy.
1. Independent monetary policy loss
Which involves restrict of growth in total demand by the increase and decrease of base rate. For example if government increase the base rate because of the higher demand and raising prices , will reduce the demand and it results to lower consumer expenditure and there would be a high motivation to save and more cost of borrowing. On joining the Euro-zone the interest rate would be decided by the European Central Bank. This rate is based on the economic situation of all EU member countries. There are very clear economic structural differences within the members of European Union. So the decrease or increase of aggregate demand results a positive impact on an economy at the same time negative to another one. UK would not able to make any change in their monetary policy based on their economic situation if they join in Euro.
2. Fiscal policy
Fiscal policy is used to control aggregate demand and it is closely related to monetary policy. Fiscal policy regulates the amount of taxation and government spending. Expansionary fiscal policy involves an increase in taxes or government expenditure and deflationary policy involves the opposite. Increase in taxation results lower income which causes to go down consumer expenditure and results decrease in aggregate demand. Adoption of euro severely affects fiscal policy means after that UK cannot raise the amount of government spending to boost total demand.
3. Exchange rate policy
It is the revaluation and deflation of a currency in order to contract with equilibrium of payment deficit. After the membership this right changes from the British government to European Central Bank. History shows that care selected devaluations can help an economy to overcome difficulties. The lack of exchange rate affects the method for adjusting inequality between the nations that can come up from various shocks to their economies.
4. Instability of External Economy
The effect is same as like in sole trading. In a sole trading death of a one partner would lead the whole business to loss or face more difficulties to run. Likewise there is a partnership between European Union members in the use of single currency. The European Union economy as a sizable significance when compared with the United States and Japan, they gained an vast success because of the integration of overall region. This makes sure that the integration of overall region has a vital role in economic development of any country. So any problem with economies of member states will affect the development of British economy also.
5. Difficulty to recover from recession
It is very difficult to getting out from a recession because if UK is unable to reduce interest rates, it will be not easy to boost demand.
6. Sensitivity to interest Rates
The nature of the housing market of UK shows the economy is too responsive to changes in interest rates. Unlike other countries of Europe most of UK residential has their own house and the variable mortgage is a high proportion of their returns. So a minute change in interest change can dramatically influence disposable income.
7. The cost of replacement
There will be huge expenses to replace or alter the present systems and machineries like IT system, coin machines and the training cost for staff training.
8. More Fraud rate
Detecting forgeries would be highly complicate because euro notes are come in more varieties compare with pound.
BRITISH GOVERNMENT VIEW ABOUT JOINING THE EURO ZONE
The government of United Kingdom proposed a five economic test, depends upon the results only they will decide to join or not in euro
1. Flexibility
Ensure the ability of the economy of United Kingdom to response to the economic changes will be efficient and quickly. And also make sure that shock would not last for long.
2. Convergence
By this test they need to ensure that it is practical that a single interest rate is good for a long period of time for all the members of European Monetary Union.
3. Financial services
It is test for analysing the financial position of eurozone before and after the participation.
4. Investment
To ensure that there no problem for any investors they are willing to invest for a long term for eurozone.
5. Growth, stability and employment
If joining in eurozone, how affect the stability, growth and employment for public. They need to sure that all these will be secu
Based on this analysis the government of United Kingdom decided to not join eurozone until the five test will pass in the future.
CONCLUSION
To conclude there is a lot of positive and negative aspects if United Kingdom joins the European Monetary Union. It is sure that euro would be the most important currency in future. Consider with the current financial crisis no one can predict the future of world economy and how it will recover from the recession. So there will be a chance to euro replace the United States dollar as a trade currency and reserve currency. And it is a true that euro shows more stability than pound sterling. At the same time If United kingdom joins with euro it will face so many problems, mainly because of the current economic recession. United Kingdom would loss its right for independent policies. And country is completely suffering due to the recession so it is not practical to take any decisions which affect the economy. If there is any change in base rate the reaction of highly sensitive mortgage market is unpredictable. The participation of single currency will give some more benefit to the bigger business mans and investors at the same time it will not be good for whole British market in present situation. The results of government’s five economic test also suggest this not good time to join with euro. And the government also take a ‘wait and see’ policy. To analysing all advantages and disadvantages it is clear that If United Kingdom joins with single currency it will face a lot of difficulties. And it is not a good decision whether United Kingdom decide to participate single currency now.
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REFERENCE
• http://wiki.w2n.net/pages/Euro.w2n
• http://www.economicshelp.org/europe/benefits-euro.html
• http://www.economicshelp.org/europe/costs-euro.html
• http://www.economicshelp.org/europe/benefits-euro.html
• http://www.managementjournals.com/journals/finance/article87.htm
• http://www.historylearningsite.co.uk/euro.htm
• http:// rope.eu.int/comm./economy_finance/euro/benefit_2en.htm
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