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European Union
Economic Integration
United Kingdom
Sharushka Odayan, Ridge High School
BACKGROUND
Beginning in the early 1970s, the coordinators of the European Union have seen a single currency as an
essential factor, in the European community’s development. The argument follows that in a world that is
globalizing, and entertaining vast competing national economies—if the individually small European economies do
not come together to form a collective power, they may all become obsolete, and their individual economies will
suffer among larger competing powers 1. “As a whole, Europe is an important part of the world economy—the
Eurozone’s GDP alone averages over £4,000bn. Therefore, the EU needs an integrated economy, with one single
transparent currency in order to secure its importance within the global economy and give it the ability to compete
with world powers such as the U.S. and Japan. The economic advantages of integration include increased trade
inside and across the Eurozone’s borders because transaction costs would be simplified and reduced. Companies
would no longer have to deal with different national currencies; furthermore, businesses would not have to
experience losses due to unexpected exchange rate changes. The Euro should be a success if it maintains a steady
and strong value—that is if all countries in the Eurozone have similar, healthy levels of growth, inflation, and
employment. Without measures to ensure similar economic conditions across the Eurozone, poorer countries would
not benefit, and the Euro could disintegrate due to the strains of currency imbalances.” This is why in 1992 the
Maastricht Treaty, which set up the EMU, established a convergence criteria and explains why Eurozone countries
must have common interest rates determined by the European Central Bank (ECB) 2. Problems include the inability
of member states to borrow money if their economy is suffering; it is also difficult for members to sort out large
unemployment problems because they cannot change the interest rate on their own. The Euro could fail if the
fundamentals of the Eurozone are weak and imbalanced causing its market value to rapidly fall, triggering severe
domestic economic problems within member states. If it does fail, the situation would be disastrous to former
member states as they would not be able to compete in the global economy on their own, and would suffer severe
recessions. However, as it the chances of problems being encountered are possible but very slight 3.
UNITED KINGDOM’S POSITION ON ECONOMIC INTEGRATION 4
The United Kingdom has been a member of the EU since 1973. “The attitude of the present government
toward further integration however, is mixed. The government has yet to decide whether it will adopt the Euro as its
currency and plans to hold a referendum letting the decision lie in the hands of the people, if and when the five
economic tests indicate that entry into the Eurozone would prove beneficial.” The tests are distinct from any
political decision to join. The UK treasury is responsible for assessing the tests. Membership of the EMU would
mean that the UK would have to adopt the Euro as its currency, and UK interest rates would be set by the ECB, on
the basis of economic conditions in the Eurozone as a whole. The decision on EMU membership reflects what the
government believes is best for the long term economic interests of the British people and performance of the UK
economy as a whole. Stability, productivity, and employment opportunity are the foundations of the British
government’s economic strategy. The policy toward the EMU is founded on four key factors 4:
1.
2.
3.
4.
1
A successful single currency within a single European market would be of benefit to Europe and to the
UK; in terms of trade transparency of costs and currency stability.
The constitutional issue is a factor in the UK’s decision but it is not a huge one, as long as membership
is in the national interest, the case is clear and unambiguous and there is popular consent.
the basis for the decision as to whether there is a clear and unambiguous economic case for
membership is the Treasury’s comprehensive assessment of the five economic tests
Whenever the decision to enter is made by the Government, it should be put to a referendum of the
British people.
From wikipedia www.wikipedia.org
http://www.guardian.co.uk/theissues/article/0,,437105,00.html
3 Contemporary Review: Britain and the Euro http://www.findarticles.com/p/articless/ (Paul Brothwood)
4 All information on the UK’s views on economic integration in this position paper came from the HM Treasury Document
http://www.hm-treasury.gov.uk./documents/international_issues/the_euro/assessment/report/euro_assess03_repexecsum.cfm
2
Furthermore the Five Economic Tests are as follows4:
1. Are business cycles and economic structures compatible so that we and others could live comfortably
with Euro interest rates on a permanent basis?
2. If problems emerge, is there sufficient flexibility to deal with them?
3. Would joining the EMU create better conditions for firms making long-term decisions to invest in
Britain?
4. What impact would entry into the EMU have on the competitive position of the UK’s financial
services industry, particularly the City’s wholesale markets?
5. In summary, will joining the EMU promote higher growth, stability and lasting increase in jobs?
“Considering ‘what if’ the UK had joined the EMU in 1999, at the same time as the first 11 members indicates that
the UK economy could potentially have experienced greater economic instability than has been the case, however
significant progress has been made to address the UK’s lack of a sustainable and durable convergence, seen in the
Treasury’s 1997 assessment.” Subsequently the conclusions of the five economic tests are as follows4:
A. Convergence-- There remains structural difference within the Eurozone such as the housing market.
Because of the risks these factors hold, and the fact that significant changes would take time to form,
there is no confidence that UK business cycles are sufficiently compatible with those of the Eurozone,
in order to allow the UK to live comfortably with interest rates on a permanent basis. While the extent
of convergence with the Eurozone has increased, at the present time the convergence test is not met.
However, the government has announced a policy to produce high levels of output and employment,
which will help make the economy more convergent in the future.
B. Flexibility—greater flexibility in the UK and Eurozone would minimize output and employment
instability, helping to ensure that potential benefits of joining the EMU could be realized. At the
moment, the government cannot be confident that UK flexibility while improved is sufficient.
C. Investment-- UK productivity has been held back by long term under investment. A successfully
operating EMU and UK membership of it would boost FDI (foreign direct investment) over the long
term. If sustainable convergence is achieved we can be confident that the quantity and quality of
investment would increase making sure that the investment test was met.
D. Financial Services--While the UK’s financial services sector would remain competitive inside or
outside the Eurozone, entry would offer more of a chance to compete, and gain the effects of EU
integration that would come out of a single currency. The financial services test is met.
E. Growth, Stability, and employment—this test would be met once the convergence test has been met.
1
From wikipedia www.wikipedia.org
http://www.guardian.co.uk/theissues/article/0,,437105,00.html
3 Contemporary Review: Britain and the Euro http://www.findarticles.com/p/articless/ (Paul Brothwood)
4 All information on the UK’s views on economic integration in this position paper came from the HM Treasury Document
http://www.hm-treasury.gov.uk./documents/international_issues/the_euro/assessment/report/euro_assess03_repexecsum.cfm
2