Economic and Monetary Union
Economic and monetary union is a single market with a common currency (). It is to be distinguished from mere currency union which does not involve a single market. This the fifth stage of market integration. EMU is established through a currency-related trade pact.
In economics, a monetary union is a situation where several countries have agreed to share a single currency among them (). The European economic and monetary union, for example, consists of three coordinating economic policy and culminating with adoption of the euro, EU’s single currency.
According to (1998), European economic and monetary union means one monetary policy, interest rate and central bank (ECB). It also involves a fixed relationship between the currency units of participating member states their replacement by a single currency, prior to the euro. The objective of EMU is to move forward beyond the regime of relatively fixed but adjustable exchange rates established in 1979 under the aegis of the European Monetary System (EMS). This zone of relative monetary stability would be converted into complete monetary union through the single currency.
The most obvious advantage concerns the elimination of the transaction costs involved in changing EU currencies, both for the traveling public but more significantly for trading purposes. The European Commission estimated that savings could amount to 0.4% of total EU GDP per year, which could provide a significant stimulus to competition and saving for European consumers over a long period of time (, 1990).There would also be elimination of currency risks with a resulting increase of trade and investment between states. Interest rates would fall so that investment and growth would increase. In addition, the Union would be an area of low inflation and inflationary wage expectations would be reduced. It would also be easy for the companies to compare prices with their competitors which may encourage competition and may result in lower prices for consumers. Using single currency will stimulate economic growth and may reduce unemployment rates in the participating member states.
However, with this union the member states would likely to face some costs and risks. According to (1998), the principal cost is the sacrifice of an independent monetary and exchange rate policy in circumstances where national fiscal policy to counteract the effects of unexpected economic shocks might be very severely constrained, where no contra-cyclical Community budget exists and where, moreover, in Continental Europe labor markets are notoriously sclerotic, with very little labor mobility between regions and across frontiers in response to job opportunities.
In addition, countries have different economic cycles in which a single monetary policy cannot be appropriate for all of them simultaneously. Monetary union which promotes common monetary and fiscal policies will remove an important source of differences in their economic policies at the expense of prolonged unemployment in some countries if the monetary union coverage does not correspond to optimum currency area.
Further concern is whether the monetary and fiscal policies of the monetary union will be sufficiently flexible to cope with economic shocks especially recessions.
Moreover, concerns also centered around loss of national sovereignty for each of the participating states. Participating states may not be able to pull out a national economic crisis without the ability to devalue its national currency and encourage exports. Another is that participating states will be forces to give tax breaks to compete with each other and those companies may lower wages for their employees and to lower prices on goods that they produce. Other countries fear that joining EMU may pull their country down to the economic equivalent of the least common denominator saddling them with the economic problems of countries with less successful economy.
Twelve member states of the European Union have entered the third stage and have adopted the euros as their currency. However, the United Kingdom and Denmark have exempted themselves from the transition to the third stage of EMU.
According to (1998), no previous UK government had much positive to say about Europe for many years and there is a largely hostile press. A large percentage of the population is anti-EMU and there is only a small margin in favor of continued EC membership. The debate on EMU has to be considered, against the effects on the City, on inward investment, the competitiveness of the UK economy, the volubility and over-valuation of sterling and the fact that the UK trade cycle is currently different from most of Continental Europe.
In addition, the fiscal–monetary mix also has to be weighed, bearing in mind that fiscal policy is a question of political judgment whereas monetary policy is broadly not political but governed by economic circumstances. Staying out would not be a soft option because of the need to maintain low inflation, fiscal prudence and the need to avoid accusations of competitive devaluation. Finally the question of UK relations with the European Union more generally is of great importance.
When other countries have been clamoring to be part of the euro, Britain has been reluctant. (2002) judge the British reason through the study of lessons of history and how the British experience differs from that of most other countries in Europe since, for good or ill. According to (200), most European countries, large or small, have repeatedly had to carry out changes which have drastically altered their internal currencies. However, the pound of Britain as a unit of account has never had to be replaced by a “new pound” or any other designation in 1,300 years, in contrast to the French franc or the various German currencies such as the Reichsmark, Rentenmark, Ostmark and Deutschemark, to mention merely some of the more modern changes.
With Britain’s head start in the Industrial Revolution, developments in banking, her victory over her most powerful rival in the Napoleonic Wars, and the spread of the British Empire during the 19th century, the pound sterling became the world’s most important currency (, 2002). England has enjoyed a relatively stable single national currency with an unbroken history of over 900 years, and the origins of the pound Sterling go back even further still.
In addition, A range of studies by the National Institute suggests that a part of the foreign investment in Britain appears to take place because Britain offers a gateway to the European Union. If the United Kingdom remains outside the monetary union, then other countries are likely to offer a more attractive gateway. The profitability of foreign investment in Britain will be affected by changes to the value of the euro altering costs set in sterling relative to sales prices fixed in euros; this may deter foreign investment in Britain.
Moreover, a recent study from the National Institute (, 2000) suggests that, inside the monetary union, Britain will face an inflation rate which is less volatile and a level of output which is more volatile than those we have at present. We expect such circumstances to be more favorable for firms investing in the UK because inflation volatility leads to prices becoming increasingly uncertain in the indefinite future while output uncertainty has only short-term effects.
The present position of the UK could look like the reflection of a rational decision to ‘wait and see’. By not joining immediately the UK has the opportunity to learn from the experience of others and to assure itself on aspects of the Euro-zone construction about which there are or were legitimate doubts. UK by standing outside might hope to learn something useful which is probably reassuring, even if the time elapsed so far is comparatively short.
Moreover, the cost of monetary union for the UK is high. A British government survey, conducted in 1998, revealed that 95% of small and medium-sized enterprises, defined as those employing less than 250 employees, had at that time made no preparations for the impact of the euro and that 65% considered that none were necessary (, 2000).
The UK, with a higher proportion of trade outside the euro zone, will gain less than most other potential participants. Moreover, whilst transaction costs may be a relatively onerous burden for small exporting companies, their larger competitors typically face costs as low as 0.05% for transactions exceeding million (., 1997).
The impact of currency conversion will be restricted to UK exports were the UK to remain independent of EMU. However, membership would require the transformation of all prices currently represented in sterling into euros, and therefore imply similar changes to many domestic products in terms of marketing, size or quality of the product.
Negative features arising from the introduction of the single currency include transition costs. This includes consumer psychological adjustment to a new monetary value system. However, the adjustment costs for business are likely to be considerably larger. These include the changeover in record and accounting systems, requiring the adaptation of computerized systems and the need to open euro bank accounts, coupled to a temporary need for dual pricing.
The European Banking Federation calculated that the EU banking sector is required to spend between 6.3 (pounds sterling) and 7.9 billion (pounds sterling) over a three-to four-year period (, 1995). This amounts to 2% of operating costs for each changeover year, a sum exceeding 900 (pounds sterling) million per annum for the UK banking sector. The British Retail Consortium has estimated the cost of currency changeover to be approximately 3.5 billion [pounds sterling], 17% of this resulting from six months of dual labeling of all products after the introduction of the single currency (, 1998).
Generally, UK has not joined the monetary union for the reason of high transition costs that would be incurred and it would mean that they would be dependent on the EMU in monetary needs of the country.
References
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