Wednesday, September 28, 2011

United Kingdom’s Challenges in the European Monetary and Economic Union (EMU)



This monograph faces the question why the United Kingdom ‘opted out’ of the European Monetary and Economic Union (EMU). Then, an analysis will be drawn in accordance to the advantages and the disadvantages of the EMU for UK’s economic and business environment.
From Bordo’s and Jonung’s book (2000), it was stated that since the European Monetary System (EMS) was introduced in 1979, which aims to minimize the risk of changes of exchange rates that hampered trade between the European countries. In this mechanism as ascribed in the research of Cohen and Wyplosz (1989), the currencies in Europe were tied together in narrow fluctuation bands of ± 2.25 % towards each other. Since 1993 this bands have been "temporary expanded" to ±15 %. This system existed 1999 as the European Economic and Monetary Union (EMU) succeeded the EMS with its task to introduce the Euro as single currency.
The UK left the EMS after two years membership in 1992 on the so-called ′Black Wednesday′ on September 16th. Due to a "loss of trust in the EMS, where several EMS currencies got under devaluation pressure," after there have been heavy differences between high interest rates in Germany and low interest rates in the USA, what made "finance flow towards the EMS and out of US dollars and sterling." The British government "took drastic measures to attempt to maintain a rigid position but neither was sufficient to prevent sales of sterling from reducing its rate against its currency well below the EMS ′floor′ DM 2.78. This was withdrawn from the EMS system and allowed to ′float′." 

Another big topic circulated in Bordo’s and Jonung’s working paper (1999) is the public opinion in the UK. A big number of people do not want to give up the Pound for the Euro, which is regarded as inferior. The government still emphasizes the economic side of effects of joining the EMU, but it does not take much influence on the public opinion. The opposition uses the fear of the citizens to gain votes and tried to win the elections on 7 June 2001 on that topic.

Click here to download the full paper for free.