Why the formation of the Economic and Monetary Union (EMU) continues to impair the UK’s economic progress
All joining countries were recommended to attain certain economic criteria beforehand to ensure that at least, they were somewhat aligned and showed some similarities. Indeed, if countries were too different, the adoption of a common interest rate by all countries would be unmanageable. So why was the prospect of the EMU not such a good idea for Britain?
To evaluate this, we may need to look at the economic performances of both the UK and the EMU member states after the common currency was adopted in January 1999 and physical currency entered circulation in the early 2000s. Europe experienced differing levels of economic prosperity during these times. Some countries revelled in prosperity whilst others experienced some prosperity mixed with difficulty. Altogether, Europe enjoyed a certain degree of opulence in the time leading up to the financial crisis in 2008. However, since then, the resultant economic performances have been prominent. Many countries have stagnated and suffered in both economic and social terms.
Having lost their autonomous policy tools, their methods of adjustment following idiosyncratic asymmetric shocks (in this case the financial crisis), have been restricted. No longer can governments manipulate their exchange rates or implement monetary policy freely, but instead, they have had to accept the market exchange rate of the euro and common interest rate set by the European Central Bank (ECB). Therefore, when economic shocks occur, the process of adjustment in these countries is a much longer one in a monetary union compared to the process of adjustment in the pre EMU era where countries were able to manipulate their own policies. The net effect is that some countries gain to the detriment of others who may take longer to ‘catch up’. Further, other methods of adjustment may be necessary, such as unemployment, which is more costly to a nation.
So where does the UK fit into all this? The answer mainly rests in the fact that approximately half of the UK’s trade is concentrated in the Europe. In deteriorating European markets with decreasing demand, trade with the UK is limited. Investment in the UK which previously provided a strong platform for growth is reduced forcing the UK to seek inward rather than outward investment due to a depressed labour market abroad. In this instance, UK companies lose in what were less expensive labour markets in foreign countries, increasing the risk of lower return from UK markets. In Europe, the endogenous process whereby the very formation the EMU countries have induced certain behavioural characteristics, for example, the adoption of wage bargaining rules, have seen some countries which were active in UK markets become largely absent.
A net effect of the dampened demand in EMU countries is the increase in debt to GDP ratios. Where individual debt leads to reduced household consumption, demand in these countries for UK goods is considerably reduced, forcing UK companies to reduce their supplies to previous UK customers. In the 1992 sterling crisis where devaluation was the only option for the UK government, the UK began an export led recovery. This form of recovery would be applicable to a lesser extent in the post financial crisis era due to the limited demand from EMU countries. Hence, the EMU countries are required to return to pre 2008 levels of demand and investment in order to assist the UK in achieving growth and prosperity.
Dr. Victor Chukwuemeka
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