European Single Currency

This time we’ll talk about European Union (EU) that involves a market with a single currency, a single Central Bank and a single monetary policy. There’ll be discussed European single currency, Monetary, and Fiscal policies, and effect of EU innovations on European countries from the economic perspective. The current situation in Europe and that affecting the members of the EU is one of unbalance. The Maastricht Treaty envisaged the creation of a European Central Bank, ECB. It also laid down set criteria for countries to fulfil before they could join the single currency. There were four key points that the main players of the treaty stressed were the vital characteristics that potential candidates must to be considered for entry.

Price stability in effect this means controlled inflation. The perspective country must for at least one year have had an inflation rate no more than 1.5% above the average of a most the three best performers already existing within the Union. This is because a union such as the EU would require its members to be of similar economic importance. If a candidates inflation rate exceeded the 1.5% precedent set it would harm the way that the EU functions by putting pressure on the top performers to lower their rates to create an equal set rate. Fiscal Convergence, or more simply a budget deficit. The treaty requires that the deficit should not be more than 3% of the GDP [Gross Domestic Product]. The accumulative debts should not exceed more than 60% of the GDP. Another demand is that there is stability within the currency for two years in the normal ERM bands without having devalued. This is as well as the specification that there are requests that the Interest Rate for a year long term shall not have exceeded by more than 2% of the average of at most the best inflation performer that already exists in the EU. The second phase is to start the Monetary union. On the 1st of January 199, states will start to use the Euro as an acceptable currency in the eleven states. National currencies will continue to circulate for a number of years. The ECB will take control over the monetary policy. National currencies will have parity against the Euro and not for instance against the French Franc or the German Deutschmarks.

The National Central Banks can no longer conduct their own Monetary policy. They will merely act as agents of the ECB. The exchange rate risk will be eliminated and there will be a single monetary policy throughout the European Union. The third stage will see the emergence of Euro bank notes and coins. These will circulate along with national currencies. In January 2002, the Euro notes and coins will b withdrawn from circulation as the Euro notes and coins start to circulate more widely. There will be co-ordinated switch to the Euro for transaction with the public. It is expected that the final changeover will be completed by 1st July 2002 when all national notes and coins will be withdrawn. There are several key points that the introduction of the Euro will bring. These factors will eliminate additional costs associated with national currencies, enhance price stability and transparency. It will also simplify travel across Europe, with prices stability and transparency. It will also simplify travel across Europe, with prices becoming fixed and travel more frequent. Another advantage would be the revenue saved in the transferring of one currency to the other, such a saving to the average person could mean a better holiday. If the single currency is embraced by Britain it may stimulate employment and will be able to compete with the dollar which has not been possible with regard to the national currencies of European countries, this would lead to both low inflation, and a stable monetary economy. However there would be some disadvantages of Britain scrapping the pound in favour of the European single currency. Some of these problems would be that the member states will lose their monetary policy freedom; governments will affect the employee’s contract in money terms. To even change all the machines, i.e. Cash machines, tills in be a long and costly process, not only will these be affected but so will all the business who have to change their computer systems. In a counter argument the structural weakness of the Euro, greatly effecting Britain decision. In my conclusion I have highlighted five specific Tests for Britain’s Entry to Europe.

Would entry be good for jobs, Investment will continue to come to Britain. Financial Services Industry will continue to dominate. Whether Business Cycles are compatible, whether there is sufficient flexibility to deal with problems. None of these factors have been met yet and it is unlikely that they will be clearly met. It has been argued that the European Central Bank’s decisions will have an impact on Britain.

Close attention will be required on the interest rates. Currently the interest rates will decline. There are several factors that may work against Britain. There could be a high degree of sterling volatility against the Euro. London may lose its position as the international financial centre. The government and central business will study the success of the Euro and see when the time is right.

Although there’re many facts about the pros and cons of joining the European single currency, ultimately it will be up to the British public in a referendum. It will be interesting to see how the media uses its influence as to whether the public will favour entry into Euro Land.