The arguments for and against EMU
Dr Lee Rotherham
1. Price visibility. It should be easier under EMU to
compare the price of identical products in different EU countries. This may
increase competitiveness as consumers are given the incentive to shop
internationally.
However, it is unreal to suppose that this would drive
prices down, as (i) it takes no account of real differences
in national market costs and local price differentials (local tax differences,
wages or varying local costs of manufacture) (ii) A Single
Currency already operates in the UK (the Pound) but the price of goods in
London and the North can be vastly difference, e.g. house prices, groceries,
or beer.
2. Facilitates transborder travel. No need to carry
traveller's cheques - the example often used is the man who changes his
currency as he travels round the EU. By the fifteenth capital city, he has
only half his original money - the rest having disappeared in translocation
costs before he has the chance to spend it.
But huge advances in electronic cash card debit mean
that a single currency is already in existence - the flexible friend. Anyone
can draw money via a foreign bank machine. EMU is out of date.
3. EMU encourages tight budgetary and fiscal policy.
Maastricht criteria require strict economic management.
Yet Maastricht criteria can be met without joining Stage
3 of EMU (the Euro) - or even without signing up to Maastricht at all. It is
an issue of optional domestic policy.
4. Removes floating exchange rate, so businesses can
better plan ahead when dealing with foreign businesses.
But this argument takes no account of the procedure by
which businesses can plan transactions using a basket of currencies. Some may
strengthen, but others will weaken, thereby evening out. In any case, Sterling
itself can be strong and weak, so even this in itself averages out over
time.
5. Helps to build an ever-closer Union closer to the hearts of the
European citizen. EMU is a visual symbol of European cooperation and
integration.
Fine if you want to be part of a federal Europe. This is
the real agenda. But we oppose it.
6. Makes life in border areas easier.
However, the UK has few of those - Northern Ireland and
Gibraltar. And there, identity is important.
7. Creates globally strong currency to counter / complement Dollar
and Yen.
This is an argument for paranoid French Government
Officials.
8. Lower interest rates in the UK, with an effect on
mortgages and business investment.
But we can have zero rates right now if we wanted to.
The Bank of England only sets them high if the country needs them high. To
drop them to continental levels wily nilly is economic stupidity.
9. Seen as securing the City of London as a global financial
centre.
This is nonsense and scare mongering. The City actually
will do better if it is distinct and different. We already handle most of the
trade in euros while being out.
10. Fear that inward investros could pull out.
Again, these are groundless fears. Foreign investors
like Britain because of our language, skills, and open work environment.
Investment has continued despite our Maastrict opt-out way back in
1992.
11. Early entry will give the UK a greater voice in the development
of the Single Currency.
True, it will give out Bank of England one paltry vote
in the Central Bank. But Maastricht forbids Downing Street and Parliament even
to lobby this vote.
- A floating exchange rate acts as a safety value. The
Pound strengthened or weakens as the economy requires, thereby releasing
tension on the other means of managing the economy (unemployment levels and
interest rates), which have a direct impact on jobs.
- Asymmetric shocks. Shocks which hit one region, industry
or country hard are better absorbed if the currency takes some of the blow. It
is not possible with one currency to cover different circumstances across one
zone. Interest rate needs will vary from one area to another. the bigger the
currency, the worse it handles a local crisis. A huge currency handles a
national crisis poorly.
- Gold and foreign currency reserves will have to be
handed over in bulk to the Central Bank - billions of pounds worth.
- Emu will lead to the centralisation of social security.
Lack of a mobile labour force due to language barriers, means that regions of
high unemployment would develop (as happens on a smaller scale today with
Merseyside in the UK, Picardie in France and Naples in Italy). This pressure
will grow for huge regional transfers to support regional / national
unemployment. But the EU only has a budget ceiling of 1.27% of total national
budgets, and this will have to grow, and be managed centrally. So it leads to
one government for Europe to handle a giant tax system.
- It could also lead to other policy pressures. An
independent foreign or military policy could require the backing of the
Central Bank, since it might call for the use of gold reserves or commitments
beyond the now-limited national ones. Managers of the Euro could Veto another
Suez, Falklands or Gulf War because they could breach treaty stipulations on
common management of the currency.
- Pensions. Huge liability and future debts exist on the
continent, but there is a positive balance for the UK economy in the future
because we more on private and less on state pensions. Pressure will grow for
a central budget to handle this European problem - at UK expense.
- Democratic accountability. Concerns are expressed at who
holds the Central Bank to account. The answer is simple - nobody.
- The European Central Bank has no track record. It will
take time to acquire one for market stability. there was a notable poor start
over the selection of Wim Duisenberg as Bank President, and again over Prodi's
remarks about Italy leaving EMU.
- Costs. Of the new computer system, tills, cash points,
shop price re-jigging, minting 18 billion coins etc. This falls heavily on
small and medium businesses, who can ill afford it.
- Confusion. To consumers, particularly at the time of
dual pricing.
- Price hiking. Shops may round up to take advantage of
price confusion and recoup transaction costs for changing currencies.
Consumers pay.
- Projected savings may be less that anticipated for
business. The UK transaction services are highly computerised.
Charges for money transfer and exchange in the UK may be extremely close to
the real costs involved, rather than being invented bank charges. Thus savings
from joining the Euro may be marginal. And most companies don't deal heavily
in Euro business anyway.
An extract from EMU Understood: What the experts
say about the euro ... in English Published by CAFE
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