Ifm

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 Commissionin Brussels decided the membership of 11EU-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% higherthan 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.

2) Why did the UK opt out?

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 and disadvantages of the UK

joining the single currency?

1) Economic consequences of the UK opting out

i) 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.

Then, it will lead to :• Higher risk premium on interest rates• Greater exchange rate volatility

Lower rates of investment and growth

Higher unemployment and strains on governmentfinances.

• 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.

ii) Benefits of opting out :

• The UK, like other “outs”, will be shielded from the counter-cyclical fiscal policy instability.

• It will also be spared the inevitable political frictions which will arise in the process of adjustment to a single monetary 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 business competitiveness in the new Euro-zone environment.

Costs in changing their systems in order totrade 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 rate decisions

• The UK, due to being a long-term Outsider, would beunlikely to have any serious influence on measures adopted by the EMU members.

Principle Advantages for the 11 members of the Euro-zone

• Abolition of barriers to a single European market

• The domestic market needs a single currency i.e.: currency crises in autumn 92/summer 93• Retirement of operation costs

• No exchange rate losses for companies i.e.: Germany lives up to 60 % from EU export

• Price transparency

• Long-term economic stability

ii) Advantages of joining

Cqs : Higher growth in the Euro-zone

• Increased competition

• Greater specialisation and trade within the Euro-zone

• Euro will bring more integrated European financialmarkets.

• 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 EUcountries is below average.

c) Actual news & opinions about a membership in the single currency.

The Government’s National Changeover Plan shows that Tony 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

How could UK join the s.c.?

Britain could switch to Euro in 40 months

ReferendumDecision UK Joins Euro Cash End

40 months

4 months 24-30 months 6 months

conclu

THANK YOU