The one of the most astonishing event in the world monetary history is the introduction of the single currency in the Europe. This whole process took almost half of the 20th century to reach this goal and finally glimpses the EURO circle in European countries. However, there are still some European countries left for example UK, Denmark and Sweden that are potential members of the European Union but not the member of the single currency. Therefore, it becomes obligatory for them to estimate properly all the costs and benefits of this decision. My dissertation topic is all about single currency criteria in relation to Britain by analysing crucial economic variables to determine whether move on to the euro will bring advantages to the UK or not?
Focusing on the monetary integrated concept, the dissertation topic has been drawn on the basis of single market with single money, the crucial factors of the economic variables to analysis and investigates the possible advantages for UK by joining euro during the current global crisis. On January 2009, euro celebrated his tenth anniversary. At present there are total 16 countries that has joined the single currency .The interestingly euro enlargement figure shows that, Euro creating a strong monetary integrated circle with in the Euro area and leading for international reserve currency after US dollar. Worst economic performance and rising concept of monetary integration offered a numbers of calls to the UK to enter into the Euro Zone but the UK neglected all those calls and decided to stay out. Historically, UK never had a part of the fully Europe. The former prime minister of UK in 1953, stated that “the idea of single unit is good” but also said “we have our own dream our own task, we are with Europe but not of it, we are linked but not combined, we are interested and associated but not absorbed” (Worcester News, 2008). After 57 years from this statement, UK still not has been fully member of EU. Although, UK is in Europe but not the part of euro currency. But now, when the global recession escalating in a fast pace this question again emerge that “should UK need to join EU”. According to the Reuters 2009, Britain must reopen the euro debate because of loss in value of pound during recession. They also stated strong reason for adopting single currency- the UK country that have a huge banking sector with a small currency which are not a global reserve currency must tie up with larger area to adjust the shocks (Reuters UK, 2009). Recently, Lord Mandelson, the secretary described the euro as a great success and wanted to join (Chapman J, 2009). I just reopen this topic for the prospective of UK to identify whether joining euro during current crisis bring benefits to the UK or not. However, the decision to join euro is wholly depends on the British people and the British government. So, in my dissertation I just tried to reveal the current picture of British economy in relation to Euro entry.
Before embarking to the importance let's have a look on the dissertation topic. To advance the knowledge from gathered information which has been created in the past is the main importance of any research. In other word, the dissertation topic itself is the main importance of research. As it's clear from the topic, current dissertation focused around the British's ongoing dilemma that is euro entry. For successful entry first it is important to investigate whether the UK economy is ready to adopt the Euro or not. That's what the one of the main aim of the current dissertation. The important economic variable has been used to analyses for final findings. These variables are: exchange rates and volatility, level of international trade, long term and short term interest rate, inflation and employment rates in both regions.
Q1- Is the UK ready to adopt the Euro currency?
Q2- Will euro brings advantages to the UK economy?
The importance of the topic stems from its area of focus and purpose. Focusing on some important economic variables, the dissertation primary purpose is to investigate the possibilities of Euro adoption for the UK. Euro may or may not be ready to adopt euro currency but it is obligatory to answer this question in order to find out the possibly advantages which euro can bring to the UK economy especially during current global crisis. The dissertation derives greater primary importance upon consideration of the relationship between the UK and the Euro Zone economic variables. As OCA theory says, the single market needs single currency to increase the trade as US has. So question occur why not UK has. Insofar as it proceeds from an acknowledgement of the current global crisis and the matter of economic stability the present study “whether move on to the euro during current financial crisis bring advantages to the UK economy” is important.
The purpose of the dissertation research is linked with two problems which has a special importance to the UK economy. Firstly, the problem with loss of the value of pound which further decreases the trade flows between the UK and the countries. Secondly, the problem with current economic condition mainly occurred because of the current financial crisis. In contrast, the UK needs an immediate recovery tool. This both problems can be solved either by implement successful monetary policy or by adopting euro to increase the trade and eliminate the exchange rate risk to boost the economic growth. The current dissertation chooses euro option to recover the UK's economy. As mentioned above, the dissertation aims to analysis the economic variables to find the significant difference between both regions which will further help us to find the current picture of UK's economy in turn to enter into Euro zone. Therefore, the latest quantitative data related to economic variable of both regions need to be collected. These variables are limited to the specific period, nearly 1999 to the end of 2009 and may become problematic to collect from different sources. However there is no interview carried out with public or any consultants. So, the results depend upon an individual bias and depending on my personal opinion driven from research study. At last, it is needless to say, this study is only limited to the interest of the UK. No any other countries in relation to join single currency can predict its economic condition via this research.
The dissertation has been categorised in five chapters followed by introduction chapter, in which the topic, importance, purposes are drawn. The second chapter consists of literature review part; in which various theories are underpin to find the research gap. After that the research methodology chapter has been categorised the methods of research that have been adopted for current dissertation. Chapter fourth consists of findings and analysis. Finally, discussion and conclusion have been drawn in chapter fifth.
In summary, this chapter sets the scene for the rest of the dissertation chapters. It explained on which basis the dissertation topic has been drawn. Various comments raised by authors have reviewed in order to look at the background of the research topic. Thereafter, the importance, limitations, research question and the dissertation structure has been drawn up.
If we are to have any confidence in the findings of this study, it is necessary that we begin with a solid theoretical framework and an understanding of some economic theories related to research questions. According to the literature review, there is huge theoretical and empirical evidence related with microeconomic policy and economic variables which identify and reveal numerous issues that are critical when discussing the readiness of group of countries for single currency creation. Some economic theories which are underpinned to find out the central question are discussed briefly below.
The part of context for joining the single currency criteria revolves around the Robert Mundell's(1961) ‘The Theory of Optimum Currency Area'. This theory considered a geographical region and states that the economies of different countries should be optimized if the entire region shared a single currency. The OCA theory plays a vital role for the creation of single currency because it sets characteristics for monetary integration. Various articles related OCA theory has been encountered in literature review part for understanding the deep knowledge
The theory of OCA was pioneered by Robert Mundell in 1961. This economic theory offers to analyse the conditions for reducing the costs and maximizing the benefits of forming or joining a monetary union. The country is said to be optimal currency area when similarities between the economic structures of countries makes them feasible to adopt a single currency. There are numbers of single currency areas all around the world in the form of integrate and pegging system. European Union and Caribbean dollar are the successful example. Adopting single currency decision is always complicated and often derived from country's political, economical and historical roots. Adoption of Deutche Mark in 1990 by Eastern Germany (Dornbusch et al,1992), poor economic condition of El Salvador (Tower and Borzutzky, 2004) and historical roots of Hong-Kong (pegged with US dollar) (Rajan and Siregar, 2002) respectively are the good references for these complexities.
According to the literature, OCA theory can be laid down in two dimensions. The first dimension tries to find the economic variable to determine where should be the boundaries of the single currency drawn. The second dimension believes that “To be a part of single currency the specific country should need to complete the economic requirements (Harvath et al, 2002). After World War 2, when the exchange rate regime established, countries reluctant to think on both of the facets of OCA. The US dollar was then made convertible in terms of fixed amount of gold to make its currency more stable. With effect of this, many countries noticed US dollar as a stable currency and for that reason some of them countries adopted US dollar and some of them pegged its local currencies to the highly stabled US dollar.
However, the concept of fixed exchange rate received a lot of attention but there were a few researchers like Friedman (1953) who stated that only those countries can cope with the exogenous shock which have flexible exchange rate system. Later this hypothesis was used by Mundell (1961) to develop the OCA in which he stated that the creation of single currency is based on the two factors mobility that is external and internal. Mundell's (1961) OCA theory received a lot of criticism because of unrealistic and simplistic assumption. For instance, Phillips curve which was used to develop OCA has also been criticised in 1960-1970's. Mc Kinnon (2000) also argued that the “OCA model is full of neo- Keynesian theory” that believes any shock would be able to reduced by national monetary or fiscal policy.
In the essence, argument is that why the UK should join the euro. Numerous cases have already been discussed by various economists. Paul Volcker (2002) is one who published the cases for and against of adopting the Euro. The main argument issuing around the single currency criteria is an increase in the volume of trade. Trade is a primary factor for economic growth. The international trade theory strongly believes that ‘increased openness can increase productivity and hence real output and incomes increased' (Hill, 2007). Latest technology in the modern world allows countries to reduce the transportation cost and with elimination of exchange rate further boost the trade. Meanwhile, there will be an increase in foreign investment in UK and reduction in the cost of capital. This in turn leads to a boost in trade among the integrated countries. The HM treasury (2003) stated that, “Our assessment makes clear that, with the advent of the single currency, trade within the euro area has already been expanded and that, with Britain in the euro, British trade with the euro area could increase substantially - perhaps to the extent of 50 per cent over 30 years.”
Although, the Rose (2005) finding has cleared that the currency union seemed to have a large effect on trade, one of these studies concluded that ‘the member of currency union traded over three time as much as otherwise similar pairs of countries'(Rose.K.A, Stanley.D.T (2005). With effect of increase trade in intraregional, the case for economic divergence decreases. This means that every country's economy would become more likely to each other's. Meanwhile, there is a decrease in asymmetric shocks. Simultaneously, the sign of business synchronisation emerge which leads greater integration between countries (Horvath. R and L. Komárek (2002). Furthermore, to access in greater integration especially when integration occur because of the transportation cost, the accessing countries should be specialised in goods and services to get benefit for the long term period (Krugman, P. (1993). Significant indication has been noticed by Elliot (2008) that, the European countries having comparative advantage in specialising sector change the shape of European economy. Since financial sector is the comparative advantage of the UK economy, if the UK joins the Euro Zone it would access more integrated European capital market than now.
Conversely, the reasons that why UK decided not to join the Euro Zone were mainly interest rate and lack of convergence in economic. The UK interest rate was substantially higher than EU during HM first assessment. After that, significant efforts were shown to meet the EU criteria to allow the UK to join. According to the Gordon brown statement “we have pursued since 1997 - an independent central bank, new fiscal rules, lower debt, housing market reform, greater flexibility in labour, capital and product markets including an independent Competition Commission - have contributed to meeting, quite comfortably, the Maastricht criteria for nominal convergence - in a better position than some current members were in 1997 and even are now - but are also leading towards the sustainable convergence and greater flexibility required by the five tests.” (HM Treasury, 2003). Currently if we look at the economic convergence and interest rate figures then we can find out that both legal formalities are already met since 2003. The only reason for not joined is that “we were not sure whether this rate of convergence relevant for long term or not” (HM treasury, 2003). The core element included housing market and inflation rate which were also the solid key factors against the EURO. However, the sub-prime recession fully vaporised both obstacle. With effect of this, fear for loss of competitiveness due to high inflation rates for the UK is reduced. Correspondingly, the value of UK and Euro is very similar because of fall in value in UK pound. The Fig: 1 below shows the cyclical convergence between UK and the EURO and the long term real interest rates in EURO area and the UK.
The Fig: 2 (cited by Buiter) clearly shows that the cyclical convergence and long term interest rate between both countries already met since 2003.
Apart from this, the other major obstacle also considered in the HM treasury assessment was housing market. Housing market in the UK was much stronger than the rest of the EU. But the UK mortgage market collapsed recently due to global financial crises. The housing market stood at the bottom level as compared to the past experience (Buiter, 2008). Respectively, the argument for housing market coincides between UK and EU, and does not hold much value than before. “The UK model of housing finance is broken. Measures to encourage truly long-term fixed-rate financing (20-year or 30-year fixed rate mortgages) are long overdue. New mortgage financing has collapsed, the securitisation of new mortgages has grounded to a halt, and the construction sector (residential and commercial) is teetering on the brink of disaster” (Buiter, 2008).
It has already been discussed extendedly by many economics whether adopting Euro will be beneficial to the UK or not (Minford (2002), Artis(ghg), Buiter(2008). The core argument for all these studies was “floating exchange rate”. Is floating exchange helped enough to the country to protect from any economic shocks? This is complex in nature and in certain cases it is true though. For example, floating exchange rate enabled countries to dampen the impact of shocks and hence allow economy to recover more rapidly than others. Although, the benefits of monetary autonomy will still be present if the exchange rate are determined by non- fundamental factors. The factors that drive the exchange rate enable to confer on the central bank autonomy to determine the existing amount of base money and use that as a policy instrument by setting domestic short term interest rates (Dicecio R, 2009). For the case of preventing shocks corsetti (2007) presented the model in which he concluded that both fixed and floating exchange rate fails to equally adhere the fundamentals (Corsetti, G, 2007).
Is UK unwilling to join EMU just because it considers floating exchange rate as a benefit tool for economic prosperity or because it is afraid from the past experience in 1992? DiCecio (2009) stated that if Britain had join the Euro area they still felt the economic shocks as they fell now via different channels. They also concluded that the economic stability also diminishes under monetary union if goods are imports from euro area as primarily intermediates instead of finished goods.
Apart from delivering extensive benefits to the participating economies, single currency also imposes costs. According to the McKinnon (2002), the major reasons why a country should not join single currency are: loss of monetary autonomy in response to asymmetric shocks and unstable monetary standard. McKinnon (2002) stated that “in the world there is no sufficiently stable monetary standard”. The national government of the countries reluctantly give up its sovereignty if they tie up with single currency. Immediate entry would impose numerous economic shocks and that would affect on economy as a whole.
Loss of control over the monetary policy is the one of the main arguments issuing around “why the UK should not join the EU”? Monetary policy are jointly controlled by the countries by having only one single currency which means if exogenous shocks occur in any country they will not be able to protect itself via shifting its interest rates or exchange rates. Indeed, Because of the relation to the leading trading partners, the Single currency can provide the necessary stability normally for the smaller open economies. However, for the UK to be linking with other dominant countries would be pointless because it would also take the exogenous shocks of smaller economies.
Although, it is not necessary that joining monetary union means the end of the independent fiscal policy for its member states. The fully monetary union countries can keep their fiscal policies independent. However, in order to adjust the asymmetric shock in common currency area some centralised decision need to be achieved. Typically, centralisation budgets are often imposed to an increase in spending. (Horvath R and L Komarek, 2002). Clearly, The UK has no reason to fear for any type of reduction in fiscal policy by joining the Euro zone to manage its national economy (Buiter, 2008).
The Loss of control over sovereignty is also important to mention because it is assumed to be an important source of fiscal revenues and is often argued to be a major disadvantage of adopting single currency. Literally, no hard concept is applicable for measuring sovereignty. Eventually, the choice of concept depends on the specific environment in which base money is created. Due to this, the fiscal concept is considered as the most general concept for measuring sovereignty (Schobert. F, 2003). Theoretically, to fight against the increasing debts, the government should not opt out for printing money because this leads to increase in inflation. However, in practice, the volatility of economic cycles pushes country economy into critical recessions. At this stage, government gets reluctant to look over sovereignty to fix problem as early as possible before the economy totally collapses. For example the sub-prime mortgage recession in US combined with budget deficit forced the US government to print more money to avoid their economy collapse. Aftermath, the sub-prime mortgage recession triggered the financial crises all over the world. With effect, UK also pumped half of billion in the economy for recovery hope (Fleming.S, 2009). “Should the Britain join the EU”, this alternative was also available for Britain but due to the risk of uncertainty in economic recovery and imbalance between economically and politically reasons, this option halted to the ground.
Apart from the sovereign, the volatility of exchange rates also has negative effects on economic calculation. However, this volatility helps the stock market to make huge money. Furthermore, during the sub-prime recession period before it knocked to the UK financial sector, the UK consumers enjoyed a higher welfare gains than any other USA or European countries because of strongest position of the pound. On the contrary, if there is uncertainty in exchange rate, the expected profit of investment will be low which could lead positive effect on output. Hence, theoretical outcome related to volatility of exchange rate is ambiguous (Horvath, 2002).
If the economic cycles are synchronized between the countries, the chances of asymmetric shocks increase. Mostly, European countries (especially industrial countries) are doing intra industrial trade based on the scale of economies and the imperfect competition. That allowed countries to increase trade without increase in specialisation growth. Hence, the asymmetric shocks likely to decreases (Harvath et al 2002). Also, if Krugman's (1993) argument becomes true then, those shocks may become more severe. Countries then need to specialise in goods to cope with shocks. Furthermore, those shocks expected to strike on concentrated areas which already have a strong bonding to cope. Correspondingly, the dilemma with Krugman's (1993) view is that “it implicitly assumes that regional concentration of industry will not cross the borders of the countries that formed the union, while borders will be less relevant in influencing the shape of these concentration effects. If so, then asymmetric shock is not country specific and floating exchange rate variation could not be used to deal with asymmetric shocks anyway” (Horvath, 2002).
Another argument at the glance in monetary union is “trade increases”. Theoretically, increase trade inside the euro tends likely to decrease the trade outside the euro. As a result, the area become less prone to external shocks and makes it easier to deal with the systematic shocks. But is that work in real? For instance, with the US sub-prime mortgage crisis, countries within the euro area suffered as much as outside the euro. It is so, because subprime crises triggered the whole financial market and further extended to the global trade. In contrast, the fact is that the existence of trade within the euro area failed the countries to protect from external shocks and hence also become the victim. It can also be argued that the integrated trade with the presence of multinational companies in large geographical area will also not protect the countries against the financial shocks. Similarly, the example can be given from oil prices. The oil price shocks quickly translated to the current economic whether it is inside or outside the OCA because of limited supply of oil and with greater demand.
According to the Rose and Frankel (1998), countries should follow the similar economic cycle in order to join single currency. Furthermore, the more integrated trade between countries having same currency, the more their economic cycle converge. So the argument for pre- joining criteria for single currency is not necessary. Harvath et al (2002) also mentioned that the EMU entry raises the trade within the single currency that causes the business cycle more convergent to participate.
UK highly depends on the profits of the city and the housing market which keeps the UK economy different than any euro country. And it is also noticeable that if they had joined the euro than the situation would become worse for the UK economy especially during the recession which is still ongoing. Elliot (2008) also argued that in UK during the period of inflation in housing market the Interest rates was lower and during the period of deflation in housing market the interest rates was higher. In this situation, the UK has to clearly figure out the housing difference in order to protect any future shock.
In summary, this chapter has reviewed an OCA and some monetary policy theory that attempt to explain the costs and the benefits of adopting single currency area. The above literature are examined carefully to grasp the knowledge of research question and to find out the gap between both. As earlier stated, this is an economic issue and the economic condition changes time to time. HM treasury (2003), Professor Minford (2003), did their job on the same issue but with different methods. The data was collected and analysis was appropriate to the condition and the method at that particular time. New data need to be collected and analysed to answer the present situation. In the next chapter I will throw some light on the methods and techniques to be used in dissertation.
This chapter aims to provide an overview of the methodological approaches and research design selected for application to a study on economic issue of Britain entry in Euro zone. In its exploration of the phenomenon of Britain and Europe economic conditions and paradigms, the dissertation shall investigate the economic variables of both the UK and the EU to seek the first questions whether Britain is ready to adopt the single currency the euro or not. Secondly, dissertation will throw some light on the comparatively performance of Britain and other European countries economy such as Germany, France, Italy and Spain to investigate the apparent advantages to facilitate whether move on to the Euro during current financial crisis will be helpful for the UK or not. Thirdly, following the analysis of secondary data collected through a various economic theories, the dissertation shall critique prevalent to finding the answers. Finally, a proposal for the Britain entry into EU shall be proposed and the proposal defended through empirical evidence.
In the part of text or statement of research methodology, each research throws up a set of unique questions and expresses that distinctly for a specified group of objectives. The act of expressing the view distinctly by collecting and analysing the data are known as research design. Additionally, both research method and research design serves to link the research questions to the data. Thus the collaboration of research methods, research designs and research strategies helps to test the hypothesis by underpin collection and analysis of data to satisfy the research objectives (Punch, 2000). For successful research, the researcher has to pass through the four stages which are: the selection of question to be research, identifying the relevant data of research question, determination of data and finally the last stage research method selection by which data can be analyse (Punch, 2000).
The methodology applied in the current dissertation described in the form of ‘research onion'. The research onion is used to give clear and structural view to the reader about the method and strategy that has been designed. Starting from the outer layer the process is progressively peeled to the core to make dissertation research more systematic. Figure 3 shows the research onion process as applied in this current dissertation. The words in the bold indicate the chosen methods of each step.
It would be appropriate to describe methodology from the base which means examining the principal ideas and concepts first. As mentioned above, data collection and data analysis are the basic techniques which in turn, depend on the characteristics of data. With the help of innumerable amount of sources available, data is classified as quantitative and qualitative based on its content and interpretation. Therefore, the characteristics of the techniques and concepts depend on the type of data (Saunders, 2007; Creswell, 2003; Miles and Huberman, 1994).
This research discuses if the United Kingdom should join the Euro or not. Apart from this, the relation between pound and sterling is explained. Use of currencies and macroeconomic variables for the United Kingdom and European Union includes use of quantitative data. These variables consist of Imports and exports, inflation rate, interest rate and employment in both regions. Therefore, the current research is thoroughly quantitative. Data has been collected depending on the current monetary sources. This was done based on the information provided by the various statistical organizations and data bases such as Eurostat (2009) and Global View (2009).
According to the “research onion”, the second inner layer that is ‘time horizon' should be defined in term to deliver the exact nature of the research study. The literature review demonstrates the current research as complex and interactive process which means data may inevitably change over time as relationships develop and mature. Therefore, data should rely upon to look backward as well as forward time period by capturing some longitudinal and cross sectional data.
Meanwhile, to trace the dynamic and historical development of some economic variables (such as interest rate, unemployment rate, currency fluctuation etc), longitudinal time horizons method has been used which gave the possibility to estimate the volatility and dynamics between the both currencies (the Pound and the Euro). Practically, the above economic variables are difficult to characterise in the isolated period of time. Thus, data picture captured must be rich for longitudinal time (Sekaran, 2006; Heckman and Leaner, 2007). So, the data in time series is extended from 1990 to the end of 2009. Particularly, the reason for choosing that time of period is to observe the indicator of some economic variables before and after the introduction of the Euro. Furthermore, to observe the exact indicator of the pre- Euro and post- Euro variables, almost, equivalent period has been chosen to allow making comparison and drawing a final conclusion about the main research.
However, longitudinal framework would not enough for inspecting the current problem. To make a unified framework, cross sectional time horizon has also been used to identify and understand the potential interaction between different actors and thus the behaviour they demonstrate to create the process taking place. In short, the dissertation research has equipped both cross-sectional and longitudinal data.
Before embarking to the method of data gathering, it is important to throw some light on the methodology principle which allows researcher to choose specified data collection method according to the research requirement. In research procedure, data collection and data analysis is considered as vital key to reach at the conclusion. However, the procedures can be carried out in two or more steps or by one step depending on the research choice. Indeed, if research choice requires the characteristics of all methods namely, mono, mixed and multi method than it would not be prohibited by methodological principles. The fact is that, both the data collection and data analysis procedure cannot exist and operate in isolation form (Saunders, 2007; Lundberg and young, 2005). In addition to this, the research study is not only associated with quantitative and qualitative data but also with primary and secondary data.
In simple term, research related to mono method uses single quantitative data collection technique and research related to multi method uses several data collection techniques. However, data analysis procedures can be limited by either qualitative or quantitative form in both methods. Lastly, research related to mixed method uses both qualitative and quantitative data techniques and procedures (Saunders, 2007; Lundberg and young, 2005).
In the current dissertation research, mono method has been used in relation to research choice. The single technique used in dissertation to retrieve the data makes mono method more reasonable to adopt. The adopted mono method used the economic indicators which have been taken from statistical sources (also available publically) for the dissertation findings. Therefore, no survey or interviews were carried out to compose this study a multi method. However, the complexity of the research question that is “whether the Britain are ready to adopt the single currency or not” needs to collect and analyses a range of data. And according to the Punch (2000), the research data collection should be relevant to the research question. So, in current dissertation relevant economic indicators data related to the UK and the Euro zone area has been collected and analysed. These are mainly, currency fluctuation, international trade level, inflation and unemployment rate, interest rate. As mentioned above, these data are not acquired from surveying people or applying techniques but from statistical sources. Therefore, it can be said that, for effective solution with rational answer, the selected mono method is the best suited method for the current research.
The Following next two layers of ‘research onion' are research strategies and research approaches. These two layers are exceptionally interrelated each other because the research approach leads to choose the strategies. In short, the strategies can only be formed on chosen approach. So, imposing research approaches prior to research strategies would be more logical than vice versa. The current dissertation research used deductive approach.
In the consequence, the stages of deductive research begin with hypotheses which are originated according to the theoretical concept considered in the literature review. Going one step further, testing hypothesis by utilise collection of data considered to be another important stage in the process of deductive approach. Subsequently, with the light of findings the theroy can be modified if necessary. In other words, deductive approach implies testing already exiating theory in the framework of a certain case (Saunders, 2007; Bryman and Bell, 2007). On the other hand, inductive approach may lead to some inexperienced or unconfirmed theoretical laws from a certain form of data (can be quantitative or qualitative data) (Saunders, 2007). The empirical research in literature review underpins with hypothesis prior to collection of data makes deductive approach more appropriate and useful to follow.
In relation to dissertation research, the chosen deductive approach should need to be defined in brief. Firstly, from the early scenario, the two hypotheses were drawn which has to be tested by analyzing data:
H1- euro will bring benefit to the UK in the current condition of credit crises.
H2- euro will not bring benefit to the UK in the current condition of credit crises.
The above hypotheses are formulated according to the theoretical position studied in literature review and both hypotheses have a strong importance in relation to the current dissertation the one of the reason lied in the research question. As it is clear that the first hypothesis is contradict to the second hypothesis so, both hypotheses cannot be true or wrong at the same time. Again, according to the presented scenarion, data collection techniques and data analysis procedures have been called to prove one of the two assumptions and to reject the other. At the final stage the finding have been compared to the the notion of optimum currency area and monetary union theory, in other words, the theory was specified.
In the context, the selected deductive approach would gain a lot to findings and also considered to be as a best approaching method than any other given methods. The few reasons behind this are; firstly, “deductive approaches explain casual relationship between variables” (Saunders, 2007). Secondly, the two contradicting hypothesis (as mentioned above) would definitely turn anyone to be true. Hence, the finding would be more rational and allowed to reduce the chance of unforeseen results. It also should be argued that the final findings have to be objectivism and originate as an individual from earlier estimate (Bryman and Bell, 2007, p. 11). Mostly, it turned up to be true especially in the case when research operates with qualitative data. As mentioned above, the current dissertation findings deal with two possible solutions. To investigate impartially, objectivism philosophy has been used in the research.
Finally, selecting an appropriate research strategy is a key theme in dissertation. Research strategy identifies the key features and makes plans according to the research requirement (Robson, M. 2002). In this research, I have selected comparative analysis strategy for current dissertation. The Britain may be prepared for the euro adoption. But, will Euro bring advantages to the Britain? This study may have numerous pros and cons. To compare and balance this all, comparative analysis strategy has been used. Starting from the volatility of currency, the Britain currency volatility (pound) will compared to the volatility of Euro. After that, inflation rate between both of the countries will be evaluated and compared. If UK will join the Euro, there will be single monetary policy set by European central bank. In this situation, if business cycles of the UK do not converge with the Euro zone business cycle, the single monetary policy may fail to be effective and bring disadvantages to the UK economy. To investigate this, the comparison of business cycles in the UK and the Euro Zone countries has been focused in research. On the other hand, to consider one of the advantages to joining Euro, increased international trade has been mentioned. Single currency eliminates exchange rate risk which brings benefit to increase the trade. This further tested by the analysis of international trade level represented by imports and exports which were used to compare the growth between both regions.
As may be inferred from the above, this chapter presents the findings and the analysis of the research study by overseeing secondary resources. On the basis of the secondary resources conducted with economic policies, the crucial economic variables have been analysed and finding has been drawn up to assess the two main research questions: ‘Is the UK ready to adopt the Euro' if yes, ‘whether move on to the single currency the Euro would be benefit for the UK or not' . As mentioned in the methodology chapter, the current dissertation has chosen comparative analysis. So, in the essence of findings the two or more countries variables (Euro zone countries) have been analysed which in turn to show the considerable variation in the performance of the UK and the Euro zone countries. However, the difference between two economies has been already presented extensively by various authors (such as, Mingford, Artis, Buiter). To make this study different from previously published analysis, attention has been brought to the main economic factors specifically exchange rates and its volatility, international trade volume, inflation rate and employment rate in both regions.
Particularly, exchange rate volatility has been analysed in the current dissertation over the period of 1999 (when Euro was introduced and adopted by major countries such as Italy, Germany, France, and Spain) to the period of 2009. Furthermore, to get a greater sense of knowledge about volatility various currency pairs have been analysed such as EUR/GBP, EUR/CHF, and GBP/CHF. Practically, it has been cleared that higher the volatility, higher the risk for MNE's because they deal with several currencies. Although, hedging can reduce this risk but cannot eliminate completely. Moreover, the hedging strategies sometime may have negative impact on the current circumstances and make that even worse if the exchange rates drive in unexpected direction. Overall the exchange rate volatility demonstrates that the UK is ready to join the euro as there is not vast difference in exchange rate during current period.
Followed by volatility of the exchange rates, the second crucial economic variable ‘International trade' has been analysed. Logically, volume of imports and exports has been used to represent the international trade between the five major countries namely the UK, Germany, Italy, Spain and the France. Again data analysis for international trade has been limited to the boundary of European Union and the time period for investigation has been taken earlier to the adoption of Euro and extended to 2008. Thus, the study expected to find out that the international trade volume increased in those countries who have adopted euro currency. For comparative analysis, the UK volume of international trade has compared to the euro zone area. Finding derived from that analysis demonstrates the benefit of single currency and speculated the positive impact on the UK international trade volume.
Interest rates between both regions are another economic variable that has also been focused in analyses part. In order to investigate acutely, two types of interest rates have been explored: short term interest rates and the base rates of ECB (European Central Bank) and BOE (Bank of England). Theoretically, the monetary policy will be ineffective if the interest rates are different among the countries in same currency area. In view of that, interest rates have been analysed to determine the real convergence between both of the regions. This study helps us to find out the possible effects of risk that can emerge by adopting euro.
The analysis of inflation rates and employment rates has been followed after the analysis of interest rates in the UK and the Euro zone. These two variables are considered as the important sign of economic development. Inflation rates in single currency area often acts as obstacle for adopting countries especially if inflation rates vary between them. On the other hand, employment rates that are also considered as obstacle to merge into single currency area indicate the level of business activity and economic growth.
Broadly speaking, exchange rates represent the degree of competitiveness of domestic goods produce comparative to the foreign goods produce. So, if any fluctuation in the price of foreign goods occurs it directly translates into the national currency which means national currency also fluctuates. Strong currency demonstrate less expensive foreign goods and services on the other hand, depreciating currency demonstrates more expensive foreign goods and services, which further means the value of prices increase especially for the business who consumes import.
Figure- 4: Exchange rates of EUR/GBP
Source: Global View (2009)
The above figure shows that at the time when euro was introduced, a single unit of currency had cost approximately £0.7. In the very first year when euro started circulating, it lost around 14 per cent value. As per that figure, this can be say that the UK economy had an advantage by not joining the single currency the Euro. Figure: 4 clearly displays that for a single unit of the currency the Euro fluctuated approximate £0.5 until 2002. Thereafter, the Euro started gearing up against the British Pound and arrived at the initial value of £0.7. Stability in exchange rate appeared at the beginning of 2003 and lasted till the end of 2007. The reason for instability in exchange rate resulted in subprime mortgage crisis that started from the US and triggered to the UK financial market. With effect, the British pound collapsed nearly in the autumn of 2008 and dropped the exchange rate near to the euro approximately £1 for €1.10. By reviewing this figure it can be said that, according to the convergence criteria that was the right occasion for the UK to join the Euro as interest rate maximally converged to the euro area interest rate. However, only convergence between exchange rates would not be enough for any country to adopt single currency. Since the whole picture of single currency criteria is yet to be achieved. Moreover, the exchange rates fluctuate constantly in the derivative market except in the case of government intervention (by keeping fixed exchange rate regime as a monetary policy). And also, fluctuation in exchange rates always uneven and often deviate from the mean (Ohno K, 1990). To make it more clear, the volatility has been analysed between EUR/GBP pair in figure 5 to figure out the degree of fluctuation of each currency.
Figure- 5: Exchange rates volatility of EUR/GBP
Source: Global View (2009)
The figure 5 of exchange rates has been calculated on the basis of daily quotes by adopting following method
R= In (Pt/Pt-1)
Where R represents the return on Euro and Pt and Pt-1 represents the today's and yesterday's exchange rates. The point zero represents the mean and the other points shown the deviations from the period of 1999 to the end of 2009. Basically, a business and investor's gain depends on the direction of deviation. For instance, if deviations move to the opposite direction or unexpected direction business and investors will losses and vice versa.
Similar gain has been achieved by the UK and European Union by lowest volatility between the periods of 2002 to 2007. During that period the country's economy boosted because of low exchange rate risk. This lowest volatility period did not last for long. At the end of 2008 the figure 5 reveals the highest volatility period in past decade. Overall, the fluctuation of EUR/GBP pair was within the average limit of -0.02 to +0.02. And if, the volatility of EUR/GBP still remains in highest band than it will force the businesses to hedge more in order to protect from losses. As of result, if market failed to recover than the businesses have to bear the loss even more than they expected. Recently, it has been noticed that the MNE's company using hedging strategy at high level not because to gain profits but to protect from losses (http://www.reuters.com/article/idUSTRE63J56R20100420?feedType=RSS&feedName=everything&virtualBrandChannel=11563). They hedge more to maintain their outcome to zero so neither they neither get profit nor losses. This is the example that how much MNE's fairs from currency fluctuations.
The highest volatility of currency can be reason of global financial crisis but this should also bear in mind that the financial crisis has not stopped yet. So, is that mean UK still has to face similar or even higher volatility in future as well? The past experience is the witness that during global downturn the fair for currency fluctuation in derivative market has increased. So undoubtedly, MNE's will need to step up efforts to protect against currency fluctuation due to fair of volatility either by hedging or swapping currencies.
However, this can be too early, if we say moving on to the Euro can solve the exchange rate problem because the volatility of the EUR/ GBP does not reveal the clear picture. The above data demonstrated the fluctuation of just one pair. To be more specific for findings and analysis the neutral element i.e., Swiss Franc has been used to explain the volatility of euro and British pound individually. Thus, to find out how much each currency (Euro and GBP) fluctuates in derivative market. The reason for choosing Swiss franc is because Swiss franc considered less volatile as compared to other major currencies such as US dollars or Japanese Yen.
Source: Global View (2009)
When looking into the exchange rate between the EUR/CHF pair in Fig 6, it is clearly displayed that the behaviour of exchange rates are totally different than the previously observed EUR/GBP pair (Fig 5). Swiss franc was appreciating as compared to the Euro from the period of 1999 to 2003. That data again confirm the practical findings that the euro was not doing well at the very beginning. As euro was being circulated all over during 2003, the strength of euro beat the Swiss Franc and as a result Euro again returned to the original quote in 2007. After that, the emergence of global crisis devaluated the Euro currency against the Swiss franc. This further demonstrates that both currencies: the euro and the British pound were not strong enough to cope with global financial crisis. On that behalf, the question occurs, if Euro also failed to resist the financial shocks than how would UK bring the benefits from joining Euro? Unfortunately, it is true though from analysis, if UK had joined the euro they still had to face similar trend of devaluation of currency especially during current financial conditions. However, this also should be noticed that the devaluation of currency would not be worse as now because adoption of Euro also add some other monetary functions such as an increase in international trade that could lead to strongest economic trade.
Source: Global View (2009)
In the pair of EUR/CHF (fig: 7), the average volatility was significantly lower as compared to the previous observed pair GBP/EUR (fig: 4). Volatility increased just as in the previous case between the periods of the late 2008 to the early 2009. However, prior to the crisis, lower volatility has been noticed in the Euro currency except in the period of 2000's when the euro was recently launched. Again in this case, the similar trend noticed that the volatility of currency increase during global financial crisis and both the Euro and the GBP are fluctuate in similar band.
On the other hand, the volatility and exchange rates between GBP/CHF are analysed in two following figures.
Figure 8 Exchange Rates of GBP/CHF
Source: Global View (2009)
Source: Global View (2009)
When British pound is compared against the Swiss franc (figure 8), the data revealed that, in the late 2008 the British pound lost its value around 40 percent. This declined period leads to the lowest exchange rate with highest volatility.
Overall, by analysing all above data, this can be demonstrate that, even besides the recent economic and financial trends the volatility of pound considered to be highly volatile as compare to EUR/CHF. This allows making an assumption that by joining the Euro zone, the UK government can provide a reduction of exchange rate risk to the multinational corporations by adopting a less volatile currency. This can be expected to make the UK goods and services more competitive since the transaction costs will decrease and the exchange rate risks for importers will also be reduced. Moreover, this should also be noticed that, since the creation of euro the capital market within the euro area is becoming deeper, broader and more integrated (Zeppernick, R (2008). This extinguish market reduced the cost of capital for euro area firms. The firms will invest only if the certainty about returns is greater than the cost but in the case of UK, the transaction cost reduces the certainty of profit (HM Treasury (2003). As a result the most MNE's fails to reap the profit. This can also be the reason that why the UK based companies uses Euro for transaction purpose instead of pounds. In short, this cost can only be reduced by eliminating exchange rate risk.
However, the cost can also be reduced with the help of derivative markets. The hedging strategy is one of them but the undervaluation of risk or speculation in the financial markets can sometimes hurt the country's economy even more. The similar trend can be seen in the recent global financial crisis when most of the companies attempted securitisation in order to manage a risk and at last they failed to recover (rerfre). Practically, earning in speculate market (volatile market) works with “Highest returns at higher risk” (Madura, J. & Fox, R. 2007). So, this can be say that if the UK does not join the euro, the speculators in order to make profit can increase the volatility of the currency even more which may further leads to the financial shocks in the economy.
International trade characterize the exchange of goods and services across the national boundaries. Imports represent the level of goods and services consumed by nation. Exports represent the level of goods and services they produced and sell overseas. The contribution of net exports considered as crucial factor of GDP to increase the economic growth. In the era of profound changes, the adoption of single currency plays a vital role to increase the international trade. And this can be expected that, moving on to the Euro will boost the trade volume of UK and the Euro zone as exchange rate risk eliminated and transaction cost reduced.
The study of international trade for the prospective of UK can be demonstrated by analysing the effect of euro adoption on international trade. To make this study more specific, the level of international trade have been investigated specially for those countries who have already adopted the euro such as France, Italy, Germany and Spain.
Source: Eurostat (2009)
The data has been presented in the form of index by taking the base year 2000. The above figure (10) reveals that, the import volume in the France, Spain, Italy, Germany, and UK started diverging immediately after the adoption of Euro. From most of the observed countries the UK's imports index stood at the bottom except France. And Spain's imports consumption stood at the top as compared to others. Moreover, the figure clearly demonstrates that the volume of imports has been deteriorating after 2006. On the other hand, the volume of exports is also equally important to the study to demonstrate the effect of euro adoption
Source: Eurostat (2009)
In 1999 when the Euro was introduced, the export level was almost same in the observed countries but immediately as the euro started circulating in the global market the export level started diverging. As of result, the UK became the only victim whose export volume declined continually and still stood at the bottom as compared to the other observed countries. This can be say that, the UK's volume of exports has been strongly affected by the introduction of the Euro and this negative trend can hurt the UK's economy even more in future if UK does not join the euro. In its exploration, the Germany, Spain, Italy showed impressive results of export volume from adopting Euro. However, the France failed to demonstrate the positive result. In contrast, this allows us to assume that the adoption of Euro is not a guarantee to increase the level of international trade.
Moreover, Europe is highly dependent on the energy product (oil and gas), mostly imports from the Russia and some Middle East countries which demonstrates that Europe is not a self sufficient. Due to this, it can be say that the single currency within the optimal area does not help to increase the international trade with the partner outside the optimal area. On behalf of this finding, it can be speculate that, shifting towards to the single currency would be benefit for the UK economy and the Euro zone because it allowed increasing the bilateral trade among the euro countries. In view of latest declining trend of exports, the immediate accomplishment needs to be taken to increase the economy growth.
Moreover, the above observed Exchange rates and volatility between the UK and the EURO also demonstrated that the trade will increase if the obstacle of exchange rate risks eliminated. However, the removal of this obstacle will eliminate only one source of uncertainty for firms especially for those who mostly trade within euro area. And generally, countries should join single currency only to that area with which they trade the most. And according to the statistics of UK national account, UK does half of the trade with EU and half with rest of the world. US are the next biggest trading partner after euro but it is not possible to peg their national currency to both areas. Therefore, practically, If UK wants to join large currency market then undoubtedly euro zone is the best because other half of the trade of UK is with different currency areas. However, there can be one critical argument against joining single currency the Euro, that is joining euro means eliminate the exchange rate between both region but euro still have to float with other world major countries such as US dollar and the Japanese Yen.
Furthermore, according to the UK national account, the UK's value of export to euro was 14.5 percent of GDP in 2008 and import from euro was 16.4 per cent of GDP (Blue Book, 2009). That demonstrates that, If exchange rate volatility eliminated, the return from an investment accumulate from trade will further increase in both regions. Additionally, it would allow firms to forecast the expected rate of return from an investment. In order to gain the trade benefit and increase the investment level, move on to the single currency Euro will bring advantage to the UK economy. However, besides the international trade, it is also necessary to look at the factor of interest rates and monetary policy.
Interest rates can be characterized by the cost of borrowing which usually made by government or corporate bank to finance its expenses. Furthermore, to conduct borrowing, the government often sells its Treasury bills (short term borrowing) or bonds (long term borrowing) to investors (Premchand, A 2010). Therefore, borrowings affect the overall level of interest rates and money supply in the country. For instance, if short term interest rates are high on treasury bills than investors will prefer to put money in government debt's securities because of risk free and highest returns. As of result, the level of corporate investments and economic growth may decline because of the shortage of capital that was attracted to the government. These measures will also help to reduce inflation as the level of spending decreases.
As discussed in literature, adoption of the Euro means single monetary policy and single interest rates in the whole continent Europe. In other words, any booms or busts in any euro country can affect the other euro zone countries economy or may affect the whole euro zone. For instance, if the UK's economy becomes inflationary and the rest of the euro countries experience slow economic growth, than the ECB monetary policy intended to increase the economic growth which in turn further increase inflation in the UK.
The following figure observed the short term interest rates in the UK and the Euro zone.
Source: Eurostat (2009)
At the time of the introduction of the Euro, the UK's short term interest rates were stood at 5.5 percent and in the Euro zone at 3 percent. It can be said that, if the UK adopted the Euro currency its interest rates would have been dropped down and the UK's economy would have gained experience of increase in inflation. Furthermore, this inflation would have helped the Euro to devalue its currency against the low inflation countries.
Historically, the varying trend of the UK's and the euro zone short term interest rates were almost similar except during the period of 2003 and 2007, when trends were totally opposite. This can be because of ineffective monetary policy.
Interestingly, during the period of 2008, the convergence of short term interest rates between the UK and the Euro zone are only short by 1 percent. This demonstrates that the monetary policies in both regions are similar which reflects the benefit of adopting the Euro for the UK. However, this can be argued that, due to the recent financial crisis which explored to the global scale turned both regions to converge each others. So, after the end of crisis the business cycles may vary between both the regions.
Borrowings are usually made by government, corporations, households and banks on its own cost which are represented by interest rates. Moreover, money supply and demands are the main factor that drives the interest rates. Usually, commercial banks lend money to businesses and household fixed with the agreed rate known as lending rates. These rates are directly linked with the interest rates because on behalf of that, central banks lend money to the commercial bank to meet present requirement and to get sufficient liquidity. In simple words, this can be said that the central bank acts as a lender of last resort (Ojo, Marianne2009). Therefore, the base rate always considered as an important indicator of the monetary policy which often set by central bank in order to lend money to commercial banks. The following figure (13) reveals the interest rates of the UK and the Euro zone central bank.
Source: Eurostat (2009)
As compared to the earlier observation of short term interest rates, the both the countries' central bank (BOE and ECB) have also appeared to be more convergent. Interestingly, the trends are almost similar throughout the observed period with the exception of 2003 to 2005 when interest rates diverged. Apart from that, the overall trend is similar which demonstrate that the UK today has almost a fixed interest rate with the euro and following the European monetary policy trend so far didn't harm the UK economy and this can be speculate that this trend will not harm in the future as well if UK join the euro.
An increase in the price of goods and services represent as inflation, which could be measure by different index methods. The adopted index (CPI) used to measure the inflation in the UK and the Euro. However, the adopted index does not include the house prices but basket of consumer goods has been considered. The figure (14) below demonstrates the CPI in both regions.
Source: Eurostat (2009)
The figure (14) clearly demonstrates that the UK and the Euro zone have similar inflation rates which have been measured by CPI. This allows making an assumption that if the UK adopts Euro, common monetary policy will not hurt the UK since similar inflation rate will be targeted in the continent Europe and Great Britain. So, closer inflation rates today are another indicator of the fact that this period may be the most appropriate for the UK to join Euro zone.
However, that assumption made from the above index cannot be hundred percent right because the index reveals the opposite trend as well. That is from the period of 2000 to the period of 2004, the inflation rates were different to each others. So it can also be argued that if history repeats, given up the control of the monetary policy to the ECB could hurt the UK's economy even more. Although, this is not the full picture of the inflation rates as the PPI (Purchase Power Parity) and housing market is not considered here. Prior to US subprime mortgage crisis, the UK's housing market was booming in an escalating pace (Chamberlin, G 2009)). So, if the inflation rate observed by including housing prices, the interest rate would have became higher than what has been observed. This demonstrates that, if the bubbles in the real estate continues and are not stopped at early stage than this situation can turn into a catastrophic situation which will further lead to crisis. Common monetary policy may not be efficient since such local problems with inflation may be overlooked if other countries in the Euro zone need further stimulus for economic growth.
Besides lower inflation, the higher level of employment is also the intention of government. This variable depends on the country's monetary and fiscal policy because higher the economic growth eases the employment rate. Moreover, strong economic growth encourages the investors and consumers to spend more which in turn, leads to increase the labour force in order to provide services.
Source: Eurostat (2009)
It is visible in the above figure (15); the employment rate in the UK has had substantially higher as compared to the Euro zone over the past ten years. The data of employment rate were taken from ‘Eurostat' official website. The observed age of population for employment rate was 16 to 65. The employment rate represented as a percentage of employed people from the total population. Employment rate has a direct link up with country's economic growth and economic growth can be measure by productivity. According to the above analyses it has been clear that the international trade will increase by joining euro which means the productivity also increases. Similarly, the economic growth and employment rate will increase. At the beginning significant difference can be seen in the employment rates between both regions but at present some convergence has emerge which reveals that there are some similarities in economic condition and that similarity further indicates that there is no harm in UK economy joining euro.
In summary, the analysis of above five major economic factors clearly demonstrates that UK has lost an enormous advantage which they could have gained from joining Euro. The core perspectives were exchange rate and international trade level which were emphasised during whole analysis part. The weakness of sterling value and downward trend of trade level have had shown a ripple effect on UK's economy since the euro launched. However, some growth was noticed in UK economy (for limited period) but that was not up to the mark if we compare it with EU. Throughout the analysis, the findings derived that the UK economy sinks and swims together with EU as interest rate is maximally converged and international trade showed positive effect. Furthermore, similar trend in inflation and employment target has also been noticed which make our point strong that the UK will not harm if they join the Euro currency. At present, when global financial increasing in an alarming rate the UK needs some rescue packages in order to gain stable growth. In this circumstance, moving on to the euro could bring advantages to the UK economy. However, analysis demonstrated that neither the Euro nor the UK has strong enough to cope with recent global downturn but they also make it clear that move on to the euro would increase the trade level and will save the transaction cost for MNE's.
While the findings have only been briefly touched upon here, they shall be explored in greater detail in the next chapter, with the purpose being the testing of the hypothesis and answer to the questions.
This chapter intends to provide an answer to the question posed at the start. The answers to the questions will be clarified by throwing the light of findings and analysis. Furthermore, it will discuss by skimming the literature review theory. This chapter considered as a bird eye because the final findings and conclusion will be draw by overview all above chapters.
So far, the literature review and the analysis of the data carried out with both qualitative and quantitative form for the prospective of UK have come out strongly in favour of previously set hypotheses. The findings and analysis chapter clearly demonstrates that in current period there is no fundamental differences exist in monetary policies of the UK and the EU and UK will not harm by joining Euro.
Throughout the research, I discussed the risks and advantages of joining the Euro currency for the UK. More attention was paid on empirical data to demonstrate the current position of UK to adopt the Euro. Therefore, the current dissertation results would be in speculative way. However, dissertation aim was to show ‘whether the UK is ready to join the Euro or not' and for this essence good timing and some preconditions fulfilment for euro adoption is necessary that has been focused in this dissertation. Furthermore, current dissertation drew up the experience of euro zone countries in order to find the possible advantages for UK.
The dissertation literature review explained the cost and benefits of adopting single currency. The issues raised in literature review further supported to the findings of research such as international trade level which were likely to increase as exchange rate risk eliminated and transaction cost decreased. The reviewed literature suggested that the existence of exchange rates keeps the domestic product less competitive in foreign market. When analysing the case of UK, the findings and analysis chapter demonstrated that volatility of euro and pound keeps the UK goods and services less competitive in EU. And the trade between the two regions is argued by Elliot (2008) to have gained more importance for the economies of both the UK and Euro zone. Moreover, Elliot (2008) argues that integration will help the UK financial sector to benefit.
Furthermore, joining Euro zone would also lead to greater advantages to the firms for planting long term investment. The businesses become more efficient by removal of exchange rates which further cut down the various costs such as hedging and transaction costs. The chances for expansion mostly for MNE's will become increase by reduction in derivative costs. Moreover, without any exchange rates the client from the Euro circle will attract toward the UK which further allow increasing the inflow of investment.
Before discussing whether UK is ready to join the euro or not? Let's find weather moving on to the euro will bring advantages to the UK economy during current credit crisis or not. The answer to this question will also proof one of the previously set hypotheses. As mentioned earlier, both hypotheses cannot be right on the same time. So, one hypothesis will definitely turned out to be untrue.
The results demonstrate that, the volatility of British pound is higher than the volatility of euro. Therefore, joining the European Monetary Union can be expected to boost not only the trade with the Euro zone due to the elimination of exchange rate risks and costs of transactions or hedging, but also improve trade with other countries since the reduction of volatility of exchange rates after accepting Euro will positively affect business confidence and reduce the exchange rate risk.
Besides the elimination of exchange rates, the analysis of international trade in five major European countries represented in the form of imports and exports volume also demonstrated that trade volume increased immediately after the adoption of the Euro in most of the observed countries such as Germany, Spain and Italy. The UK refrained from joining the European Monetary Union at that time and the analysis of international trade has shown that the country underperformed compared against the majority of the observed countries in the Euro zone. However, the analysis also found that, the France volume of trade has not shown a positive effect by adopting the Euro. Consequently, this can be say that the earlier mentioned of an increase the international trade level after joining OCA cannot be fully accepted.
As mentioned in the literature review, the loss of the monetary policy is the main disadvantage of adopting single currency. The UK would not be able to conduct a domestic monetary policy in order to rectify the stage of any economic problem if they join. Legally, the full monetary policy right would be shift to the European central Bank. This contractual obligation can hurt to the UK economy when, the UK will need a stimulation of economic growth by lower interest rates while the majority of the countries in the Euro zone need to prevent the increase of inflation rates. This situation can put ECB into dilemma and will hurt one country either UK or any other euro country especially when if any changes occurred in the interest rates.
However, the obvious convergence has been observed in all crucial economic factors in the findings and analysis chapter mainly in the interest rates of central bank's. The analysis clearly demonstrates that the past decade is the witness of similar trends which allows us to finding that monetary policy of both regions sinks and swims together and during that condition joining the Euro will not heart economy but lead to extensive advantages. In spite of this, the analysis of inflation rates also demonstrates that, the UK and the EU have had similar deviation in the prices. This allows us to finding that the UK and EU monetary policies in terms of inflationary target will be almost same in near future as well.
However, the only differences found in the analyses were employment rates. The analysis clearly demonstrated that in the past decade, the employment rate of UK significantly higher than the euro zone. The only exceptions were during the current period when credit crunch took place and employment rates started decline. In contrast, this can be say that Europe needs more stimulus of monetary policy in order to increase employment rate for UK to join but this can lead to increase the inflation rates in UK. However, the current credit crisis can help to recover the monitory policy without leading any inflationary to the UK because in order to maintain employment growth during the financial crisis both regions will need similar monetary steps. So, this can be say that the current financial crisis may wipe away the disadvantages connected with deviation of monetary policies in the UK and Eurozone . Hence, the hypothesis (H1): Euro will bring benefit to the UK in the current condition of credit crises has marked as true because the overall findings and analysis results demonstrated the positive impact on UK economic and proved that UK economy will not heart by joining Euro currency. On the contrary H2, as stated in methodology chapter, automatically marked as untrue. Perhaps, there were some points (such as, loos of monetary policy and higher employment rate) that can also mark (H2) be true but by over viewing overall balance this can be say that those points are not strong enough. For instance, the loos of monetary policy point can only be considered if there were no convergence demonstrated between both countries economic variables such as interest rates and exchange rates.
Findings and analysis chapter clearly demonstrates that Besides the UK highly depend on the financial sectors, the interest rates in both regions are highly converge each other. Although, there are some difference in employment rates but at present the unemployment rates are also reached at the similar point. During the current financial period when employment rates of the UK and the Euro are low and financial sectors are facing difficulties in term of liquidity, this can be expect that the interest rates would move in future with similar trends. Similarly, both regions central banks will endeavour to increase the demand and employment more willingly than inflation. Meanwhile, if UK joins the Euro the inflation rates will also expect to move in similar trend because elimination of exchange rates would increase the demand level. So, joining euro will ease the former issue i.e., increase the employment rate and synchronise the later issue i.e., demand level. Accordingly, the current financial crisis can be taken as a positive point to enter into euro in order to gain the benefits as the analysis results shows clearly that the UK can live with EU interest rates without hurting its economy.
Overall, if euro entry positively behaved on UK's international market (as findings and analysis clearly demonstrated that it will) than this leads to greater economic growth with greater employment. The current dissertation balanced the both facets of cost and benefits for joining the Euro but, is the UK economy prepared to join the single currency? By transpired from the whole dissertation findings, the answer can be yes, the current global financial crisis are the right time to join the Euro when the crucial economic indicators (as analysed above) has maximal converged. Consequently, at present UK's economy is fully prepared to join the euro currency than ever had.
In conclusion, number of points deserves to be highlighted as findings. The first is that, volatility of pound is considered to be highly volatile as compare to EUR. This allows making an assumption that by joining the Euro zone, the UK government can provide a reduction of exchange rate risk to the multinational corporations by adopting a less volatile currency. The second, results derived from analysis speculate that, shifting towards to the single currency would be benefit for the UK economy and the Euro zone because it allows increasing the bilateral trade among the euro countries. The empirical evidence also make this point strong that, since the introduction of Euro, the trade level increase especially with in the Euro area which means if UK will join euro currency the international trade level will increase. Furthermore, UK economy is medium seized as compared to the Euro land, which is broadly dependent on exports and imports to mainly in Euro land area which means traders have to gone through exchange rates all the time and little exchange rate movement can hurt the whole UK traders. On the other hand, Euro land has a big economy and mostly they do trade within the region. So they less depends on the external trade which means they can bear exchange rate risk but in case of UK they can't. The third is that, the monetary policy of both regions in term of interest rate, inflation rate and employment rate reflects the similar movements especially during current condition. In short, UK following the European monetary policy trend so far and this can be speculated that this trend will not harm in the future as well if UK join euro.
The financial crisis has caused deep impact on the world biggest economies. UK is one of those, whose economy also experiencing the recessions. During this period it is essential to reform a monetary policy in such a way that they can cope with any downturn in future if occurs. But economically it is difficult to maintain a stable economy especially for those who has a separate currency with large financial banking sector and whose currency is not considered as a reserve currency (Buiter, 2009). In order to protect from economic downturn UK has to put his feet into the EU shoes to maintain its economy in the world.
This report has presented the study of Euro adoption for the future of UK from the economic point of view. However, the Euro adoption has imposed some social issues which should also be considered while making the decision. Social issues play a major driving force behind monetary union which cannot be assessed as economic arrangements. In short, Economics issues can be assessed in terms of measuring cost and benefits of membership but social issue can only be measured by involving people. Similarly, adoption of Euro has some other social issues because British pound and British monarch have a deep impact on British citizens. According to these reflections, it can be recommended that futures researches should be conducted to investigate the attitudes of the UK citizens joining the European Monetary Union. This can be done by taking public surveys or by collecting primary data which will help in contributing to the present results to examine the issue from both aspects: political and economical.
The purpose of this short paper is to present my own learning and knowledge that I have achieved during the whole dissertation process. Honestly there are numerous skills and extensive knowledge which are developed in me. I gained a lot of knowledge related to single currency area topic through good readings. Throughout this chapter I will highlight and briefly discuss my own reflection.
During dissertation topic, my personal growth can be compared to the composting process (in which a compost pile helps to deliver nutrients to start new growth in plants: such as flowers, vegetables, fruits). The information which I have collected through various sources played as the act of compost in dissertation process which helped me to grow my knowledge tacitly and explicitly. Similarly, I have gained new information from research methodology lectures and turned it into knowledge and finally completed my dissertation topic successfully. I am thankful that I have had the opportunity to spend so much of this year learning about the single currency topic.
I remember when I started this module I was very anxious. The reason for this was module aim. I was not good in some skills which were essential for this module for example which research method should be follow, how to collect primary and secondary data etc. However, we all know the meaning of the methods and techniques but to use in proper way is really a big thing. This was a big dilemma for me that how to present my research topic because I was not sure how I should go about taking notes. May be that was the reason I didn't pass this module during my first attempt. But spending so much time on this module gave me self esteem to complete my research study up to the standard.
Researching on biggest ongoing dilemma for UK was interesting for me because it covered a numerous aspects which helped me immensely to enhance my knowledge. Initially, I was in big trouble because I was not sure at which points I should emphasis on. The wider range of topic was the main reason for my trouble because single currency area in relation to Britain already presented extensively by various authors. So, to make my study unique from others I took a lack of time to think about the area of focus. Finally, I selected to go for “Would euro membership be beneficial for UK? Analysis of the crucial economic variables”My dissertation supervisor and the research methodology module tutor helped me a lot to keep me in rite track.
The topic “Would euro membership be beneficial for UK? Analysis of the crucial economic variables”gave me enormous explicit and tacit knowledge. The positive feedback and valuable suggestion from dissertation supervisor motivated me to complete this study. I started my research from the scratch even though it was my referral. My supervisor suggested me to review the literature again in order to find the research gap. I skimmed that literature review to the research topic for findings. I have gained a wealth of knowledge regarding the optimal currency area theory which had been taken as a lid on whole topic. Furthermore, the analysis of crucial economic variables helped me to follow the track of single currency. Research helped me to understand the current and the past economic performance of both the UK and the Euro area.
In short, the dissertation itself has a bunch of knowledge. The content page is the evidence of this. Throughout the whole dissertation process, I have established a very good understanding of economic issue regarding single currency of EU. Overall I am fully satisfied from the dissertation learning and also I am glad that I obtained the learning objectives which were mentioned in the dissertation module.
Source: Essay UK - http://turkiyegoz.com/free-essays/economics/monetary-history.php
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