To Join Or Not To Join

The “hot topic” in most of Britain today is whether or not the United Kingdom should join the one single currency of the Euro. Depending on whom you ask, you will receive varying responses from those whom are for it from a financial standpoint and those whom are against from a pride standpoint. Britain’s pride has caused problems in the past, will it continue to do the same for it’s future?

In 1992 at the signing of the Treaty of Maastricht, John Major had no idea that opting out of the Social Chapter and the monetary union would become such a widely debated topic for discussion less than a decade later. The Conservative government was opposed to these changes, because they felt the treaty threatened British autonomy. In 1997, when the Labour party gained control of Parliament, they agreed to sign the Social Chapter of the treaty; however, they did not adopt the Euro.

In order to join the EMU, the government feels the UK should pass the following five tests:

- Convergence: Are business cycles and economic structure compatible so that others and could we live comfortably with euro interest rates on a permanent basis?

- Flexibility: If problems emerge is there sufficient flexibility to deal with them?

- Investment: Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?

- Financial Services: What impact would entry into EMU have on the competitive position of the UK’s financial services industry, particularly the City’s wholesale market?

- Growth, stability, and employment: In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?

Labour is committed to ensuring all these criteria are met before they decide to join the EMU.

The United Kingdom, along with Sweden and Denmark, has chosen to remain outside of the Eurozone due to the convergence, or lack thereof, within the European Union. At the lecture with James Stewart, we learned the EU вЂ" and the Euro вЂ" would not exist without France and Germany. However, because they are the powerhouses behind the Union it allows them to “bend the rules’ in a way other minor countries are not able to. Regulations were set forth to make sure all participant countries were meeting the established criteria. If a small country, like Luxembourg, were to exceed the set budget deficit of 3%, the Union would have no difficulties telling them to straighten up their act or face removal from the Union. But when countries like Germany, whose deficit is currently at 3.8%, who is going to stand up to them and tell them to clean up their act?

Joining the EMU would create better conditions for firms making long-term investment decisions in regards to Britain; however, sustainable and durable convergence must first be achieved. Over time, cross-border and foreign direct investments will increase throughout the euro area. Britain has suffered a decline in these areas since the implementation of the EMU. Britain risks potential loss of increased inward investment in delaying adoption of the euro.

According to Simon Taylor, from JPMorgan Chase, joining the Euro would bring some added benefit to the UK. It would boost the current levels of trade, making it easier to business with single monetary transactions as compared to the current conversions that are necessary. However, this would have little direct impact on Britain, as their current foreign trading is very strong. It would also possibly stimulate foreign direct investment. For example, businesses in Spain and Portugal might be more apt to invest money in Britain if the wouldn’t be losing money that would be lost in the currency conversion. One currency, the Euro, would allow this to happen.

The City, financial center of London, has a laissez-faire attitude on whether or not the UK joins the Euro. The City will continue to thrive with or without the adoption of the single monetary unit. It continues to be a successful entity despite the setbacks in the current British economy.

Since 1997, Britain has seen a significant increase in the level of wholesale financial services in the UK. Joining the EMU would strengthen the current competitive position of this sector by offering a much greater ability to compete while securing the effects of the integration to a single currency. Delaying entry postpones these benefits.

Britain has been able to stabilize its economy whenever needed by lowering the interest rates to encourage activity or raise them in order to control inflation. The British pound currently changes based on the performance of the British economy. If the UK were to join the EMU, they would be required to trade this control. However, declining unemployment accompanied by strong employment growth gives the UK one of the lowest levels of unemployment. Waiting for inflation rates in the EMU to match those of the UK might well prove to be like waiting for icicles in hell.

Three million jobs in the UK depend on the EU. Joining the EMU would lead to a boost in trade with the euro area and an increase in the national income. Of course they are aware that in order to benefit in the increases in cross-border trade, investment, competition, and productivity provided by the EMU, the UK must first establish sustainable and durable convergence. Otherwise, the country might be unable to maintain macroeconomic stability.

Although the UK has not yet passed the convergence