stability : a sustainable inflation rate which does not exceed by more
than 1.5% the lowest 3 rates in the EU
term interest rates within 2% of the best 3 performing i.e. lowest
government deficit of no more than 3% of GDP
government debt of no more than 60% of GDP
Advantages of EMU
a single currency, there is far greater anti-inflation credibility. This
is because all of the EMU nations are linked with Germany’s Central
Bank’s very successful anti-inflation policy, therefore expectations
of inflation will be lower which leads to lower actual inflation. It will also increase a currency's stability on the
markets, therefore, there is no interest rate premium on the currency
which may lead to interest rates being
Transaction Costs and Information Costs - estimates have put these costs
at 1.6% of EU
income each year.
b) Reduced Uncertainty - from multi (flexible)
currencies. Companies may insure against this happening, but this is
still an expense.
Increased Investment -
with increased certainty both internal and international direct and
portfolio investment should increase, hopefully increasing economic and
productive efficiency and promoting economic growth.
Optimum Currency Area Theory
all of the factors of production are mobile, economic polices are
similar and there are no barriers to trade then it makes sense to have a
As firms will have a greater certainty about
future costs and revenues they will be more willing to partake in
international trade. This
will lead to increased competition which results in lower prices.
Costs for firms may lower as well as they take advantage of
economies of scale and strive to lower costs in the face of increased
of Monetary and Fiscal policy
one Government will have control which will lead to more long-term
economic planning. This
argument holds for an independent European Bank as they will not alter
the rate of interest for political gain e.g., lowering unemployment at
the expense of inflation, decreasing interest rates just before an
election to increase the feel good factor.
Government Policy will hopefully follow the business cycle rather
than the election cycle. European
policies should have:
better long-term planning
more efficient use of taxes (as cannot simply raise taxes, as people
will move elsewhere).
is often argued that due to the existence off many separate currencies,
short term speculation leads to de-stabilisation of them, with the ECU
this is less likely.
should converge and become more competitive, as workers will realise
that they are competing at only with other British firms, but also with
at Capital to Europe
ECU will be a major world currency and it is estimated that there will
be a one-off purchase of ECUs by non-Europeans that will result in a
revenue of up to $35bn.
of the City of London
City of London ranks with N.Y. and Tokyo as the major world financial
centres. It is doubtful if the City would maintain its pre-eminence
outside a single currency area, formed by the rest of Europe.
a single European currency it will be easier to finance a deficit as
interest rates will be lower as no interest rate premium. (Overall
borrowing will be easier as large sums of money available).
Disadvantages of EMU
Ability to set Interest Rates
the UK withdrew from the ERM we have followed a strict anti-inflationary
policy. This stance against
inflation was compounded when the Bank of England was given independence
over interest rate policy. By
joining EMU the UK will be losing control over one of its main economic
instruments. No longer will
the UK be able to react to inflation by raising interest rates, it will
have to wait until inflationary pressures across Europe become too
strong. If the trade cycles
of different countries across Europe do not converge, some nations will
suffer as central policies may amplify any problems they already have.
will mean that domestic countries will have reduced powers to control
their economies. European regional policies will have to compensate.
administration of the European General bank is controversial. Will it
simply be a means of the Bundesbank continuing to control monetary
policy? lt. will have to be accountable and democratically controlled.
may be massive problems (unemployment, balance of payments deficits,
etc.) caused by a free market. Fiscal policy is under European control
in the medium term, and it is unlikely that large Government expenditure
and a large PSBR would be allowed in the long run. Therefore, regional
aid from Europe would be required, but this would dramatically increase
the size of the budget, or other areas would have to be cut.
too high, a nation will experience a brain-drain, therefore countries
may be unwilling to tax which can lead to a decline in the provision of
is a problem of the EMU not due to EMU itself, but the domestic problems
of Britain (and its geographical position). If Britain is to compete,
its rail, road and communication network must be improved.
Level of Currency on Entry to EMU
took place on the level of a country’s currency as it has implications
on its exports and imports.
Q&A: Is The UK Ready For The Euro?
My five extra tests for Euro entry (Observer 13.1.02)
Is Britain Falling for Europe's Charms (Sunday Times 13.1.02)
Blair can not now be honest about the Euro (Times 10.1.02)
China backs the Euro at the Dollar's expense (Telegraph 7.1.02)
Euro Soars Against Major Currencies (bbc
The Costs and Benefits of the Euro (bbc 2.1.02)
The UK's Euro Battle (bbc 19.12.01)
The Economics of the Euro (bbc
in and who's out (FT 11.7.01)
Financial Times Euro
No Campaign Website
Yes Campaign Website
The Labour Party
UK Independence Party
The Liberal Democrats
Britain in Europe