Will the United Kingdom Join the Euro Club ??

1. International Financial
Management
Will the United Kingdom
join the EURO club ?
PRESENTED BY:
CHARU MUNDRA

2. The United Kingdom & the EU
(the Single Currency)
ABSTRACT:
a) Why did not the UK join the Single Currency?
b) What advantages and disadvantages of the UK joining the
single currency?
c) Actual news & opinions about a membership
in the single currency.
Conclusion

3. The United Kingdom & the EU
(the Single Currency)
Introduction
On 2nd May 1998 the European Commission
in Brussels decided the membership of 11
EU-countries to the Euro-
Launching on 1st Jan. 1999.
The Euro-11-Zone includes:
300 million people
19,4% of the World-GDP
18,6% of the World-Trade

4. A) Why didn’t the UK join
the single currency?
1) The convergence criteria
• An inflation rate that is no more than 1.5 % higher term
than the average of the three lowest inflation rates.
• A long term interest rate that is no more than 2% higher
than the three lowest interest rates.

5. • A government budget deficit that is no higher than
3% of GDP.
• And government debt that is no higher than 60% of GDP.

6. 2) Why did the UK opt out?

7. Arguments for UK entry into single
currency
• Lower transaction costs
• Increased trade and investments
• Lower inflation and long term
interest rates
• Political influences

8. B) What advantages and
disadvantages of the UK joining
the single currency?

9. 1) Economic consequences of
the UK opting out
i) Disadvantages of opting out
• The country, like other outsiders, will be very much
affected by the policies adopted by the EMU members.
• All decisions which relate to monetary and exchange rate
policy will be to reflect primarily the interests of the EMU
participants.
• Its trading partners would dominate decision-making
in key areas of EU policy.

10. • These partners would acquired a competitive
advantage as a result of EMU’s success.
• The gain in competitiveness of the EMU group would,
other things being equal, be equivalent to a loss of
competitiveness among the countries outside.
Then, it will lead
to :
• Higher risk premium on interest rates
• Greater exchange rate volatility
 Lower rates of investment and growth
 Higher unemployment and strains on government
finances.

11. ii) Benefits of opting out :
• The UK, like other “outs”, will be shielded from the
counter-cyclical fiscal policy instability.
•It will also be spared the inevitable political frictions
which will arise in the process of adjustment to a single
monetary policy.

12. 2) Consequences of the UK joining
(in short or long term).
i) Costs or disadvantages of joining
• Total costs for a business = £ 20 m
• costs from strategic changes to maximise the busines
competitiveness in the new Euro-zone environment.
 Costs in changing their systems in order to
trade in Euro
 Costs of transferring their base accounting
systems to the Euro

13. • No transition period for the UK
• Cost of the loss of independence in interest rate
decisions
• The UK, due to being a long-term Outsider, would be
unlikely to have any serious influence on measures
adopted by the EMU members.

14. Principle Advantages for the 11
members of the Euro-zone
• The domestic market needs a single currency
i.e.: currency crises in autumn 92/summer 93
• Retirement of operation costs
• Long-term economic stability
• No exchange rate losses for companies
i.e.: Germany lives up to 60 % from EU export
• Abolition of barriers to a single European market
• Price transparency

15. ii) Advantages of joining
• Increased competition
• 11-Euro-zone
Countries = save 0.3 - 0.4 % of EU GDP p.a.
(transaction costs).
The UK = only 0.2 % of EU GDP p.a.,
because the UK trade with other EU
countries is below average.
• Greater specialisation and trade within the Euro-zone
• Euro will bring more integrated European financial
markets.
Cqs : Higher growth in the Euro-zone

16. c) Actual news & opinions
about a membership in the single
currency.

17. How could UK join the s.c.?
The Government’s National Changeover Plan shows that
Tony Blair aims to speed up the process. The UK can
prepare more quickly than the first wave entrants managed.
Treasury sources are making clear
• no decision until after the next election
• the document gives the green light to speed up its preparations
• that a decision could be made as late 2001, with
Britain possibly joining economic and monetary union by 2003

18. Britain could switch to Euro in 40 months
Decision Referendum UK Joins Euro Cash End
4 months 24-30 months 6 months
40 months

25. conclu

26. THANK YOU