Britain – In and Out of Euro
The discussion on whether the United Kingdom should join the European Monetary Union has a long history dating back to the Thatcher government. In a special report run, BBC News (1997) pointed out the adopt of Euro as the single currency of the EU region would ensure currency stability within the participating countries and even outside the EU. This view of stability is deeply incorporated to the "reduction in transaction costs, elimination of exchange-rate uncertainty, and enhanced credibility for the monetary authority (Tsoukis, et.al., 2004, p. 185)." However, there are concerns that UK wants to consider as described in its five economic tests that should be met prior to joining the EMU (Schadler, 2005). In 1997, BBC News cited that UK was wary in joining the EMU because of the differences of the economic performances of the participating countries. And UK has been weighing the disadvantage of losing national sovereignty over their financial situations as affected by currency policy adopted by the EMU. Schadler (2005) described this as the question on sustainable convergence and the flexibility of the nation to create reactions and actions that will ensure the upward direction of the UK economy.
It must be noted that after Thatcher reforms, the UK has moved toward attainment of greater labor market flexibility at par with the United States (Smith, 2003). Although several member countries of the EU have started to move toward flexible forms of the labor market such as Germany and Spain, several others remained reluctant to adopt these changes but rather implemented strict labor market regulation (Blossfeld, 2008). This means the UK is concerned of the interest rates of the economic cycle as characterized by its variable mortgage interest rates, which is duly affected by the foreign exchange policy and rate regulations of the Bank of England (Brooks, 2012). If UK would move to joining the EMU, it is necessary to remove the policy lever of the Bank of England in managing mortgage rates, thereby eliminating the foreign exchange policy also.
Internally, this means devaluing of the domestic economy of the country to provide far better international competitiveness. In essence, this direct changes would dislocate big parts of the UK economy, and would directly increase the cost of labor, which would then escalate to substantial cost to businesses and high unemployment rate due to the strict regulation of the labor market and the creation of labor positions (See diagram for unemployment rate overview).
Should the UK enter the European Monetary Union, the Sterling or Pound would be a massive factor in setting up the rate of Euro. This means that UK manufacturing industries would benefit from the first introduction of UK to EMU due to the advantage of competitive rate, but this would put manufacturing company from other countries in a direct market disadvantage (The Treasury, 1998). UK manufacturing companies would be able to set the market atmosphere across the European Union zone. Nonetheless, although it is good to acknowledge that the UK tourism would be in great advantage when UK enters EMU, this would also increase the cost for Britons to visit places outside UK (The Treasury, 1998). In the same manner, The Treasury (1998) also noted that agricultural industries and companies would benefit from Euro as it cuts the freezing of the green zone and thereby decrease the CAP payments. As a whole, this introduction to the EMU would increase the interaction of UK with other EU members, thereby increasing the foreign direct investments. This would largely benefit several industries as cash inflows from FDI can be used to increase engagement of other industries that lay unattended due to the weariness of the foreign (Euro industries) to invest in the sterling economy.
According to Langhammer (2011), there are already 15 multinational companies that have lobbied the UK government to join the euro. Companies from Asian and US markets such as Caterpillar, Nissan, and Toyota have invested in Britain to serve their European markets (Langhammer, 2011). If UK would join the euro, these investments in Britain as headquarters for their operations throughout Europe would eventually get a regional advantage. This will ensure that their headquarter in Britain has stability across the region without being dependent or relative to the fluctuations of exchange of Euro and Sterling or pound. Across the board, this would decrease the cost of export from Britain to other parts of the continent, which would increase the profit potential of multinational companies that have Britain as their European market headquarter. Given the same principle, UK companies that gone international would also benefit from a stable currency that holds a great economic-geographical advantage. This means that UK multinational companies can easily complete with US and Japan companies that are backed by stable Yen and US dollars with market trust and advantage.
References:
BBC News. (1997). Special Reports: Pros and Cons, EMU. Retrieved from http://news.bbc.co.uk/2/hi/special_report/single_currency/25081.stm
Blossfeld, H. (2008). Young Workers, Globalization and the Labour Market: Comparing Early Working Life in Eleven Countries. Edward Elgar Publishing.
Brooks, A. (2012). Mortgage Stressbusters. John Wiley & Sons.
Langhammer, F. (2011). The Euro - Should Britain Join the European Monetary Union? GRIN Verlag.
Schadler, S. (2005). Adopting the Euro in Central Europe: Challenges Ofthe Next Step in European Integration. International Monetary Fund.
Smith, S. (2006). Labour Economics. Routledge.
The Treasury. (1998). A Review of European Economic and Monetary Union and its Implications.
Tsoukis, C. et. al. (2004). Aspects of Globalisation: Macroeconomic and Capital Market Linkages in the Integrated World Economy. Springer.
