Should The Uk Join The Euro Or Remain Master Of Its Own Fiscal Destiny. What Are The Arguments For And Against?

3005 words - 13 pages

Should Britain join the Euro or remain the master of its own fiscal policy, perhaps losing influence within the European Union (EU) as a consequence? British enthusiasm is low with only 37% of Small or Medium Enterprises favouring inclusion and 59% of small businesses opposed . An EU survey found Britain was least proud, and had the lowest opinion of Europe. Britain also had the highest public opinion against the Euro (65%) and felt it had benefited least from EU status . When assessing British business attitudes to Europe this cultural bias cannot be discounted. Certainly the government needs to help informed decisions. This document is intended to present facts by outlining the concepts of the Single Market and Currency, collate opinions and try to draw some conclusions on to which way Britain trade should proceed. Are its perceptions of Europe insight or inertia?The Single MarketComing into being on 1st January 1993 the Single Market was intended to increase economic growth by increasing productivity, efficiency and job creation. In 2004 it expands to encompass almost 500m citizens in 25 countries; surely an endorsement in itself. The objective remains to continue to remove trade barriers, enabling increased opportunities for all businesses based within EU to trade competitively within its borders. But what has been its impact on British export trade?ConceptThe then 12 EU members formalised the Single European Act (SEA) in 1986. Itwas an agreement to function as a single unified market by midnight on the 31stDecember 1992. The SEA was to work towards the 'Four Freedoms' removingprotectionist invisible trade barriers. It would open up national markets as neverpreviously possible, abolishing internal borders and facilitating the free movement ofgoods, services, people and capital within the EU. This was expected to achieve cost efficiencies for all European businesses by bringing together fragmented markets and reducing duplication in paperwork. Facing policy problems with the implementation of the SEA, the Treaty on European Union (the Maastricht Treaty) signed in 1991 overcame emerging issues. EU institutions were further empowered and it went some way to creating the international identity of the EU, outlining other policies such as economic union and the 'social chapter' that increased the freedom of movement.The 'Four freedoms':AdministrativeRed tape had long allowed the state to impose tariffs that shielded domestic marketsfrom open market pressures. Its removal meant exporters were able to reduce delivery costs. The changes extended to people also, allowing the migration of workers within the community without the need for work permits.FiscalThe restrictions on the movement of capital made inward investment complicated and risk loaded. Opening up financial markets has increased competitiveness on interest rates attracting organisations to borrow new capital for expansion. Member states have been reluctant to remove all fiscal barriers. Particular resistance hasremained to the call for harmonisation of VAT rates owing to internal budget needs.However the long term goal is recognised in order to stop citizens going toneighbouring countries to buy goods cheaper, as evidenced by the 'booze cruise'culture in the South East of England.TechnicalThe removal of restrictive practices and harmonisation of technical standards acrossthe EU enables businesses to improve their competitiveness. The CE mark hasreplaced national standards to create homogenous specifications across the EU forcomparative products. Its introduction assisted some companies benefit from economies of scale as all their production resources could be channeled to one specification instead of differentiating between national markets.The crucial role of innovation in maintaining the EU's prominent global positioning is recognized. Assistance with grants and partner locating have aided research projects and encouraged increased co-operation between EU businesses in order to improve innovation through shared technological advances.The Liberalisation of CompetitionRecognising the removal of so many barriers could be replaced with new ones the EUpassed regulations preventing deliberate interference in markets by nation states.Rules were tightened on subsidies to weak domestic industry; though how thisbalances with the restrictive Common Agricultural Policy that inhibits free trade is aparadox that may never be answered. Public procurement contracts now need to beadvertised pan EU through compulsory competitive tendering, making governmentsmore cost transparent, though causing delays in project timescales and political upsetamongst domestic business who do not win orders.Downside?Whilst price competition is good for consumers it places strain on less efficientmanufacturers. Driven to cut costs, jobs and quality can be sacrificed. However standards set centrally have helped create a more level playing field across Europe, closing the loophole of employers relocating production to less stringently policed countries where overheads may have initially been cheaper. The logistics of supply chain have also ensured relocation to poorer member states has not been as intense as might be presumed. Whilst a recent report told how Lithuania's low wage cost flat pack manufacturers are putting Swedish and German business in dire straits, it appears an isolated impact. The 2004 expansion of the EU will be a test, but the fear appears more about immigration than jobs migration.So ten years into the brave new (single) world how has British trade fared from the changes?Exports dipped in 2002 from 2001, imports and the current account deficit grew. For the first time since 1997 export value fell. Investment income was the primary export £123bn (30%), with manufactured goods £106bn (26%) and Services £86bn (21%) the other significant sectors. The EU generated 44% of income investment, 59% of manufactured goods and 37% of services exports. Further divergence of trade with continental Europe is evidenced by the fact the biggest trading partner is the United States. The £28bn income generated accounts for 23%, dwarfing the £14bn (11%) of the second placed Netherlands. The differential would be even bigger but for a distortion generated by the fact British exported goods enter Dutch ports and thus get counted in as Dutch imports. For goods and services also the US £49bn is 18% compared to Germany's £29bn (11%) . When the statistics are considered nextto the fact that that the Americas and Australasia are the only major trading blocs withwhich Britain has a trade surplus, it is not surprising that it is perceived to be morealigned with the US than the EU. Others may see a market of untapped potential,particularly following the 2004 expansion of membership.Peter Hain's, Europe Minister interpreted things differently 'we export four times as much to the EU as to the US.. ..eight of out top ten export destinations are in the EU' He eulogised further that Britain had benefited from 23 of all EU investment from abase of 17 ofEU GDP. He further reminded Euro sceptics that Unilatarelism wasnot an option. 'Blocs' not individuals now negotiated global trade bargaining. IfBritain was to have any influence it must be from within the EU not outside. Britainneeded to be at the decision tables of the EU, which decided the terms and conditionsof goods and services allowed inside its borders.The CBI does not hold EU Policy responsible for unemployment rates. Adair Turner, CBI director general, said: 'specific policies need to be decided by national governments in the light of national specific starting points' and in a report Europe - the Way Forward, the CBI sets out objectives for future workforce flexibility needs. Sub divided into six categories . The report concluded that whilst some competencies were achieved Britain trails Europe in skills and adaptability resulting in lower productivity. Does this argument stand? Certainly US productivity is 40% higher than ours. It is also higher in the Netherlands, France, Germany, Ireland and Denmark. But can this productivity be solely attributed to a skills shortage? Almost one fifth of the productivity gap with Germany is attributed to differences in skill levels, which impacts on productivity and thus profitability. A quarter of British industry claims to be struggling to fill skilled vacancies . This inevitably pushes up wage costs, operate a less proficient workforce with reduced productivity. Thus it can be argued its own government has failed British industry, not the EU policies governing trade. These factors make a strong case for encouraging labour migration with the EU, not fearing it.Peter Blackburn, President of the UK Food and Drink Federation, speaking at the CBI Conference 2000 revealed that the value of goods exported to countries in the European single market fell from 1997 to 1999. However he did acknowledge the British food industry had suffered from lost trust after the BSE crisis. As to whether the Single Market was 'delivering' he gave a 'qualified yes.'Sir Anthony Bamford, chairman of JC Bamford Excavators, was more critical of the single market's operation, citing the example of paying tax twice in two countries for oil for his tractors, and the fact that there were no consistent speed limits across borders. "I'm not questioning the need for strong regulations. But what we have is too much regulation' . A view reciprocated across the channel where a Gallop survey revealed Britain to be considered the most challenging member state to trade with owing to regulatory demands . Bamford considered regulations 'created entrenched inefficiency... at the expense of open markets and honest competition."A single currency for a Single Market?Arguably the boldest objective for the Single Market. A single currency across Europe would further enable free trade within the European Single Market. It was to remove risk from export transactions, the cost to accounts estimated by the European Commission at 0.4 of EU GDP. Capital loans would become stable, and it would create a strong currency able to fend off outside attacks by speculators, a bitter lesson learned during the ill fated Exchange Rate Mechanism (ERM), not least on Britain's infamous Black Wednesday.To this end the euro was introduced in 11 EU countries on January 1, 1999 allowing trade between these countries without any exchange rate risk. Britain has remained uncommitted so far. Whilst not discounting joining the Euro, Chancellor Brown remains cautious, setting five economic test to be passed before he would recommend inclusion .In June 2003 he declared the British economy to have matched three of the prerequisites. Thus it was not yet time to adopt the Euro. He was content that inward investment, the British financial services market. economic growth and jobs would be positively affected within the 'Euro' single currency zone. However he remained concerned that despite convergence between the business cycles of Britain and Europe, the predominance of variable rate mortgages could be inflationary factors when a European Central Bank (ECB) set rates. He also found that the lab our market still needed to be improved and more robust.It is unlikely that Britain will have a referendum on joining the Euro before 2006. So what are the trade implications for Britain?A Positive Euro?As a medium sized economy heavily dependent on imports and exports, the pound isvulnerable to currency movements. To operate outside the umbrella of the Euro would leave it susceptible to buffeting from both it and the Dollar; shielded by neither. A major reservation has been Britain's economic cyclical disparity with the EU, however it has been converging with that of mainland Europe since the late Nineties. The proportion of trade with Europe has continued to grow since the creation of the single market in 1992, and most European governments (including Britain) with high government budget deficits have managed to get them under control, increasing convergence. Furthermore the enhanced trade and investment the Euro will encourage will tie Britain ever more closely to the mainland European economic cycle.Another fear is that Britain will become increasingly uncompetitive outside the Euro zone. It is reported Multinationals have already intimated to Tony Blair that the economies of scale offered by a single 'economy' of mainland Europe could encourage relocation, losing both primary and secondary employment as the relocated companies come back to compete with remaining British companies.Proponents of the Euro hail the benefits of greater choice and better value offered by integrated and streamlined financial services; predicting prosperity, jobs and economic growth. They argue that markets are created and developed by market participation not legislation. Creating efficient and transparent markets will foster growth and employment by better allocation of Capital and reduced cost. Likewise efficient risk Capital markets will encourage innovative high growth Small or Medium Enterprises (SMEs) creating new, sustainable jobs.A Negative Euro?The advocates of the single European currency presume a symmetric Europe, wheremember states experience similar economic conditions at roughly the same time. Inreality Europe is asymmetric. The states are not homogenous; each nation hascomparative advantages and economic fluctuations impacting in varying degrees at different times. The past three British economic cycles have been closer to that of the US than mainland Europe. Verification being the pounds stability against the US Dollar and volatility against European currencies since leaving the ERM in 1992Britain has a trade deficit in all markets within the European Union. Over half of Britain's trade (both visible and invisible) is with countries outside the EU. proportionately twice as much trade is the US than any other EU country. Thus it needs to retain a global stake and the self-determination to create policy that reflects this unique standing. The possibility of operating with an unfavorable fixed exchange rate could be further detrimental to the balance of trade, already in deficit.Historically Capitalist economies have used monetary policy to reduce the impact ofthe boom bust cycle, raising interest rates to deflate the economy or devaluing thecurrency to stimulate inward investment and export growth. The ECB acting in theinterest of the currency rather than individual member states could itself have adestabilising effect on some members. Unlike continental Europe, Britain haspredominantly variable rate mortgages, making it more susceptible than fixed rate mainland Europe to changing interest rates. Indeed lower ECB interest rates at the wrong time for the British economy could cause inflationary pressures . Within the Euro currency the European Commission has acknowledged interest rates were too low in Holland, Portugal and Finland and too high in Germany, France and Italy. 'The only convergence in euroland is slow growth and deteriorating public finances' Commented Derek Scott, Tony Blairs former economic adviser . Taking away the right to regulate economic vagaries by use monetary policy clearly has serious implications.So if Britain was deprived of its ability to adjust interest rates to control money flow; what is the alternative? The prescriptive alternative to monetary policy is the fluid mobility of labour. However empirical evidence shows that Europe has had less movement than comparable economies such as the United States and Japan . This fact is not surprising given the inherent European cultural and language barriers. Indeed the EU has never encouraged labour migration, commenting that it is 'neither feasible.. ..nor perhaps desirable' If inflation is low then the solution to a static labour force is reduced nominal wages and prices. MP Heathcote-Amery foresees dangerous precedent for this 'tool' citing the gold standard in 1925 when real prices fell. However the rigidity of the labour force meant wages rose. The consequence was British industry lost its competitiveness; trade and jobs were lost in the lead up thegreat depression. He argues that initiatives such as the Social Chapter and minimum wages is creating a recipe for future problems, effectively negating the possibility of nominal wage cuts .It can be concluded that the concepts of labour mobility, flexibility and floating wagesare in reality flawed. So is the fear that the countries operating the Euro might create trade barriers to those operating outside it. However this would be both contrary to the Treaty rules governing the Single Market and, as most EU countries run a trade surplus with the UK, self-defeating by risking reciprocal measures.In conclusion it is probable Britain would vote to remain outside the Euro. Its economic ties with the Commonwealth and US are too strong. As the moment it enjoys the best of both worlds; Membership of the Single Market and a strong independent currency. Until such a time as the government finds an alternative to interest rates for capping inflation (taxation is too politically dangerous) then it is unlikely the to give up a most useful tool. In the long term as the eastern Europeaneconomies become stronger then there may be sound economic reasons for joining the Euro.BibliographyDyker, David (ed.) (2nd Ed., 1999) The European Economy (Harlow: Addison Wesley Longman) (also useful: 1st Ed.,1992)Hansen, J. and Nielsen J. (2nd Ed., 1997) An Economic Analysis of the EU (London: McGraw-Hill).Steinherr, A. (ed.) (1994), 30 years of European Monetary Integration: from the Werner plan to EMU (London: Longman).

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