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Az Euro es a Britek

2010.05.28. 01:04 Lodovik Trema

 Par honapja kellett irnom egy dolgozatot arrol, hogy az Egyesult Kiralysagnak erdemes-e csatlakoznia az Eurozonahoz. Ha osszeszedem magam, akkor ebbol posztot is fogok irni a Sardobalora, mert Magyarorszagon ma boszorkanyuldozes folyik az EUt es az Eurot kritizalok ellen. Bolddal ki van emelve az, ami Magyarorszagra nezve is nagyon fontos. A limit 1000 szo volt egyebkent, ezert ennyire tomor:

Should Britain join the single currency?


              The European Community (EU15) decided to begin the single currency project in 1986. Since the early '90s when the idea of a single European currency started to become reality there has been debate in Britain on the Euro and whether Britain should join the Euro-zone or not. Regardless of the populist tone of both sides of the debate on the Euro, economists do have tools to calculate and predict advantages and disadvantages, and determine whether UK is in the position to join or not.


              Robert Mundell developed the theory of optimum currency area in order to determine if it's worth sharing a single currency for a specific area. Mundell's theory examines 4 different fields. Firstly, countries within the optimum currency area should have a high rate of intra-area trade. In the EU only 60% of trade is domestic and Britain's rate with the EU was barely above 50% in 2003 (Economy Watch). Mundell's second point demands flexible prices that fall rapidly in a “boom era”, and wages that should fall rapidly in recession. The Euro-zone does not pass these criteria due to rigid prices and high investment in social security – except Britain and the Netherlands. Mundell's third criterion is the mobility of factors of production. Although savings and investment are extremely mobile within the EU, people (because of language problems and cultural differences) and companies did not, until recently, move. The fourth criterion requests fiscal transfers between the countries, however EU countries have never aided each other directly during a recession and Greece's recent “bailout” was actually a cheap loan from the EU with the aid of the IMF. (Ez a resz mar nem teljesen igaz.)


              Conducting a cost/benefit analysis could also evaluate the Euro-zone and help in the decision making regarding Britain joining the Euro-zone. 'Intra EU Trade' shows a positive correlation with benefits and a negative one with costs.




If a country's rate of intra-EU trade is high enough for benefits to outweigh costs, than the country will gain by joining the single currency.  In the EU, most countries are to the right on this chart and they enjoy the benefits of lower transaction costs, price transparency, lower risk premium and therefore lower interest rates and higher investment. By joining the Euro zone, Britain would also gain seigniorage (currently the UK earns £8 bn per annum). (Kicsi orszagok ezen veszitenek.)

              The most important costs of the Euro are the loss of monetary and exchange rate policies. Britain would be unable to determine its interest rate. If the interest rate is not set correctly - and it could never be set correctly for all 15+ countries unless the business cycles are synchronised – then it could lead to a lack of competitiveness (early '00s Ireland) and high employment (early '00s Germany), because Britain could not pick a trade off between inflation and unemployment. The only power that the UK would have left would be quantitative easing (government pumps money into banks and keeps the interest rate near zero), but QE could not be applied in a real life scenario as demonstrated in the Credit Crunch.


              Neither the EU nor Britain uses the aforementioned criteria in order to determine if a country is ready to join.  Britain has its own domestic criteria, the Chancellor's 5 tests, which was first introduced and conducted in 1997 - the first year of the New Labour era:


  1. Are business cycles converged?
  2. Is there flexibility to deal with shocks?
  3. Would the European Monetary Union (EMU) facilitate foreign direct investments?
  4. Would the EMU have a positive effect on financial services in UK?
  5. Will the EMU promote growth, stability and raise employment?


              In October 1997 the above tests failed and Gordon Brown waited until 2003 to test Britain again. In 2003 there were still some structural differences (especially regarding the financial sector), but business cycles were more converged than in '97. Flexibility was improved as well, but the government thought that it still wasn't enough. Investment would rise if convergence was sufficient. The fourth point was the only one that Britain passed in 2003: the EMU would have a positive effect on the financial sector (which produces 9% of GDP) and the City of London (4% of GDP) would benefit as well, because London is already the biggest market of Euro bonds. The fifth point (growth, stability, employment) is determined by convergence as well.

              After the crisis in 2008, Brown and Darling tested Britain and the country passed all 5 points. Business cycles were similar however housing finances were in ruins, so the UK would need to adopt closer regulations. After the eastern enlargement of the EU in 2004, Britain's flexibility to deal with shocks was highly improved by the cheap labour from Eastern Europe. The single currency would also facilitate foreign direct investments since outside of the Euro-zone it is a less desirable place to invest, because of price transparency and costs of exchange. Britain also has a large foreign debt and insurance costs make London uncompetitive. By joining the Euro zone, London would be more competitive with the European Central Bank's reserves (24% of global reserves) behind its currency. Pound Sterling is depreciated as well, which makes Britain highly competitive. By locking exchange rates and joining the Euro-zone, the government could make sure that it stays this way.


              The European Union has its own criteria for joining the single currency as well. The Maastricht criteria were first determined by European leaders in 1992 and were assessed in 1998. The official points of Maastricht criteria are as follows:

  1. Inflation has to be lower than the three lowest rates in Euro zone plus 1.5%
  2. Long-term bond rate has to be lowers than the countries' with three lowest inflation rates plus 2%
  3. Government budget deficit can't be higher than 3%
  4. Government debt can't be higher than 60% of GDP
  5. Britain must spend 2 years in ERM II


              Right now Britain fails on all of these points save one. Its inflation was 2.2% in 2009 while many Euro-zone countries experienced deflation (Eurostat). Britain's long-term bond rate was 3.98% in March 2010 which is a relatively low rate within the EU (ECB). Budget deficit is 12%, debt is 100% of GDP and UK is not in ERM II right now. However, Britain was not in ERM II in 1998 either yet nevertheless she was invited to join single currency. Most countries do not meet these conditions either and this is also just a nominal criteria – not a real (productivity, growth, unemployment) one – and it is relatively easy to cheat. Maastricht criteria are used as a political agenda rather than an economic one.


              Choosing the correct time to join is crucial and Britain is in a better position than ever before, but it is not easy to decide whether letting monetary policy be conducted by ECB, and giving up monetary independence is worth the benefits that Britain – this island culturally and economically stuck between USA and EU – would gain by joining the single currency.






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