The Euro Currency And European Union Economics Essay

The Euro property And European Union economicals EssayThe Euro Currency has been a resounding success and is poised to replace the sawhorse as the strongest currency in the world. The strength long-term advantages for business make it inevitable that the UK, Sweden Denmark leave behind fill to adopt the European oneness Currency short or risk damaging their long-term prosperity by staying forthIntroductionEuropean Union mission in the 21st century is toEuropes go away peace, prosperity and stability for its peoplesovercome the divisions on the continentensure that its people can live in safetypromote balanced economic and fond developmentmeet the challenges of globalisation and preserve the diversity of the peoples of Europeuphold the values that Europeans sh be, such as sustainable development and a sound environment, assess for human rights and the social foodstuff frugality.PEST Chart get together European UnionPoliticalPr however sot warGovernment go awaying l ose its reign and control over its monetary policies.Forming up as one big saving allows Europe to be competitive with a nonher(prenominal)wise strong economies such as US, China Japan.EconomicalBring down transaction barriersEconomy will be stable due to long term increase in copeInflation and come to assesss can be unified controlled.But inability to control any undesired splashiness rate.Increase of employment and application supply.Bring down Labor costs.Will be able to improve on employment issues, provide job trade opportunitiesWill increase overseas Direct Investment (FDI)SocialLost of national Sovereignty will cause unhappiness among the citizens affected.Majority of the people til now do not flout on their country joining in the European Union (EU)EU stresses on the point of social responsibility towards Resource ConservationTechnologicalshare-out of emerging technologies information.Combined effort/project of research and development activity for European e conomyImpact of technology transfer.If United Kingdom, Denmark and Sweden were to join the European Single CurrencyThe Economic Political advantages for businesses based in these countriesAdvantages (http//www.economicshelp.org/europe/benefits-euro.html)1. Transaction costs will be eliminatedThis will greatly benefit businesses who trade and tourists indoors the European Economic and Monetary Union ( emu) expanse, as on that point will be no charge for changing of currency, thus boosting the economy. It is estimated that this benefit will be equal to 1% of GDP so will be quite significant.2. Price transparencyEuropean Union (EU) companies ofttimes find it difficult to accurately compare the prices of goods, services and resources across the EU because of the distorting effects of exchange rate differences. So when price is transparent, trading starts to take place.3. No to a greater extent exchange rate fluctuations. Uncertainty eliminated.Due to the fluctuating currencies in th e EU, many firms become wary when investing in other countries because of the uncertainty. Investment would rise in the electromagnetic unit area as the currency is universal within the area, therefore the anxiety that was previously apparent is there no more.4. Single currency in individual(a) securities industry.It brings the Europes economy forward after trading has taken place more effectively and efficiently5. Be able to contend with the American Dollar and Japanese Yen.A new currency in Europe could be a rival to the twain currencies, as it seems EMU seems to be in a good pip that it can survive on its own, with or without the help of Japan and U.S.A.6. Prevent war.When countries unite trade effectively together, they dont wage war on each other and if EMU have more undisrupted trade, then there will be peace for Europe too.7. Increased Trade and reduced costs for businessesProponents of the spark off repugn that it brings considerable economic trade through the wiping out of exchange rate fluctuations, but as well as this it helps to lower costs to industry because companies will not have to buy foreign exchange for use within the EU. For them, EU represents the completion of the Single European Market. It is vital if Europe is to compete with the other large trading blocs of the Far East and North America.8. InflationThe European Central Bank (ECB) which sets matter to rates for the whole EMU area will be committed to keeping inflation low countries with traditionally high inflation will benefit from this. However, this point is debatable as countries outside the EMU have maintained low inflation.9. The Political agenda.There is also a political agenda to European bank (the European System of Central Banks -ESCB), the remotion national control over policy. Individual nation states will lose sovereignty (i.e. the ability to control their own affairs). It will pave the road to move towards ONE economical union.Disadvantages (http//www.economicshe lp.org/europe/costs-euro.html)Cost of replacing currencys and adjusting machines.(This is however a one off cost)2. Loss of autonomy over economic policy. Loss of Sovereignty.By adopting a common interest rate for the EMU area, countries will lose a crucial part of their Monetary policy. Politically, an independent central bank is often argued to be undemocratic in this setting (A Cukierman, 1994). Although countries are heading towards ONE economic union in Europe but they are definitely not, with regards to political terms.3. Countries economy are at a polar stage in the business cycle.This will be a huge problem, for instance in 2005, Ireland and Spain were increase quite fast and need higher interest rates to control inflation than other countries who need lower interest rates. Therefore with low interest rate Ireland might experience inflation. On the other hand, in 2009, Ireland and Spain were experiencing a deeper recession than the rest of the EMU area. They needed lower i nterest rates and depreciation, sequence other countries did not require to.4. The instability of the systemIn 1992, UK benefited from leaving the ERM in order to have lower interest rates and come out of recession. This showed that countries economies may not have converged and a single policy could be harmful. As Greece is heavily in debt and had caused EU to be affected, so it seems wise for UK, Sweden Denmark not to join at the moment5. Government could not devalue the Euro to overcome balance of payments problems.Countries will lose some independence over Fiscal Policy. This is because of the ontogenesis and stability pact.( e.g. no country is allowed to borrow more than 3% of its GDP. Which means that they will have to try and maintain the economy at a uniform stage to other countries. E.G. Ireland had high growth and was criticised for increasing spending, (which increases AS), Asymmetric Shocks. If one country experienced an external shock it might need a dissimilar res ponse. But this is not possible with a common currency. E.g. In order to reduce inflation, German reunification required higher interest rates, but this was not in favor for many other EU countries.6. Monetary Policy will have different effects in different countries.For example the UK is bare-ass to changes in the interest rate because many people have mortgages. And their terms conditions differ from other countries.7. The EURO has been quite unstable against the dollarWhilst Sterling has been quite stable. connexion the EU could therefore increase instability against over currencies8. The ECB is less transparent in their last makingFor example they do not produce periodical minutes, this makes interest rate changes less predictable and so countries may not be able to do their economy forecast.FIVE ECONOMIC TESTS AS PRECONDITIONS jell out by Chancellor of Exchequer in Oct 1997Used to decide for UK on the portionship of Economic and Monetary Union (EMU)To adopt Euro currency and interest rate set by European Central Bank (ECB)Build on 4 key areasBenefit trade, transparency and stabilityConstitutional issues in nation interest, popular consent, clear and unambiguousClear and unambiguous Treasurys comprehensive and rigorous assessmentReferendum agreed by British peopleFive Economic TestsAre business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?If problems emerge is there sufficient flexibility to deal with them?Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?What impact would gateway into EMU have on the competitive position of the UKs financial services industry, particularly the Citys wholesale markets?In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?UK Responses in 2003 assessmentSignificant progress on crossing, but the convergency test not met as there are still str uctural differences with the euro area, such as in the housing market. Therefore, UK are not confident of its business cycles being sufficient compatible with those of the euro area to allow the UK to live comfortably with euro area interest rates on a permanent basis.Flexibility has shown improvement for UK, but is still not confident that it is sufficient. great measures are been set out to meet the EMU requirement.UK agrees that joining EMU could potentially lower the cost for their companies which boost cross-border investiture flows and foreign direct investment (FDI). On the other hand, it is also mentioned that if sustainable and durable convergence is achieved, only then can UK be confident that the investment test is met.UK agreed that entry EMU can enhance on the competitiveness of the companies while offering some other benefit and the financial services test is metIncrease in jobs and lower cost of living can be achieved through increases in cross-border trade, investm ent, competition and productivity that EMU could provide. But again, it only sustainable and durable convergence has been achieved then can UK be confident to say that growth, stability and employment test is met.Overall, UK mentioned that improvement has been seen but it is still not ready the membership of EMU despite the risks and costs in the delay.According to Stathis Gould (2003) article,The test seem like a deliberate fudge and political excuse for UK to delay joining the single currencyLoss of control such as interest rate to ECBEU Membership impose constraint on fiscal policyJoining euro could post threat as UKs record of foreign capital recipient is among the best mainly due to relatively light regulationProblem with the irritability of euro-dollar which is not tackle by ECBFactor that might really affect the join will be to reform or better leadership in ECB which is criticized for lack of transparencyAnother factor will be the increase in competitiveness and opening of labor, product and capital marketAccording to pack Igoe Walsh (2007) study,Britains economic cycle not synchronized with euro-zone and bringingAdopting single currency will harm foreign trade and investmentClose look into the 5 excuses for Britains reluctanceDivergent business cyclesConvergence concern of losing the ability they now have to tailor monetary policyNot really the case inflation rates have essentially disappeared, as the two economies adopted the same interest rates and monetary integration promote business cycle convergence through greater trade and investmentInternational trade and investmentBritish invested more with North America and former colonies in the past, but it is not true now as many firms are also heavily invested in European Union.Joining the union benefits the large and growing number of firms and investors that trade with and invest in the rest of the Union.Overall,UK does have the capability to be in the EMU and by being in the euro member, it can really boost the economy of both their nation and other membersHas been seen as delaying the membership deliberatelyPressure for corporate in UK might also be other factor that influences their decisionFurthermore, with recent issue of Greece, Portugal, and Spain which expose the flaws in Euro Single Currency, it will be even harder to convince UK entrySUCCESSFULNESS OF EURO SINGLE CURRENCYMain Benefits press down cost of managing cash and raising capitalEliminate cost on converting currency from one country to anotherBroader, deeper and more efficient financial market result in further reduction in cost and access to a bigger capital poolLess currency riskCurrency risk and the need to protect own business transactions are eliminated or reducedSimplify investment planningBigger marketCompanies will compete in a larger and more integrated marketPopulation adds up from the member countries to form bigger marketConsumers are more readily to buy across border in euro-zone with no worry of different currencies and exchange-rateOver the years of Single CurrencyWith information from Wim F.V Vanthoor (2000) study,Has high potential in it growthCreated a market population bigger than US when group togetherGenerated high share of world GDP (Gross Domestic Product)Created even higher world trade than that of USCompatible monetary value comparing with US with the aim as to compete with US dollar propose not only Economically, but aims at going towards a political unionIn Martin Feldstein (2010) article,Crisis in Greece and the debt problems in Spain and Portugal exposed more flawsIndividual member countries lost control of monetary policy and interest rates in order to oppose to national economic conditionsExchange rate could not respond to the cumulative effects of differences in productivity and global demand trends.Weakens the market signals of fiscal deficits Eg. GreeceECB set monetary policy to the euro-zone as a whole even when it is not relevant to some membersD espite all the problem, euro will likely still survive but the fundamental root problem might still remainsIntroduction of euro imply low interest rate to Greece and some other countries which previously has high rate, resulting in temptation for political sympathies to borrow. This drives the ratio of government debt to GDP to more than 100% for Greece and Italy.Until recently, bond markets treated all euro sovereign debts as virtually equal, not raising interest rates on high-debt countries until fortuity of default became clear.Euro comparing with other currencyAgainst US DollarEuro shows it weaken and flaw especially with recent crisisAs compared with US dollar which also scat on single currency with its fifty states, its lacks in 3 economic conditionLabor mobilityLabor in US move on to another area easily when one industry weaken in a certain part of the countryWherelse unemployed workers of euro member such as Greece, Portugal, and Spain do not move to faster-growing region s of Europe because of differences in language, history, religion, union membership, etc.Wage flexibilitySubstantially slower wage growth in the states that lost industries helped to deplume and retain other industriesCentral fiscal authorityfiscal system collects roughly two-thirds of all taxes at the national level, which can be transfer to the different states if it is falling short in incomeEuro comparing with other currencyAgainst UK Sterling PoundPound Sterling has become vastly more stable in the past decade and grown in stature as a reserve currency around the worldIronically it has benefited from being outside the EuroBy not joining EMU, UK have retain their level of sovereignty and has better control and decision on solution to tackle their own economy inductionIt seems that UK, Sweden and Denmark is going to stay out of the Euro zone for a while as mentioned by Vinocur N. (March 2010)Removing currency risk and driving integration with the European single market have been the main arguments that have put forward for the three nations to join the euro. But with Greece financial issues, with Ireland, Spain Portugal following suit, it made EuroInvestec UK economist David Page mentioned that there is no chance that UK is joining the EU in the next 10 years. Conservative opposition front- reckoningner David Cameron has declared that if he wins a general election pass judgment in May, Britain will not join the euro as long as he is prime minister.Even though In year 2008, Sweden released a poll. It showed concomitant for joining the euro had increased rapidly, with 44% of Swedes now in favour of joining the currency, up from 34.6% in May, while opposition dropped from 51.7% to 48% during the same period. (http//www.guardian.co.uk/business/2008/nov/27/euro-currencies-sweden-denmark)in March 2010 as reported by Nicholas Vinocur on Reuters Swedens finance minister Anders Borg mentioned that. How well it is going in one country decides how well run the who le is, whether or not one has adopted the euro.Denmark is skeptical on joining the Euro. Danske Bank chief economist Steen Bocian, remains cautious for the next two years, due to Greece incident.