|Business Chronicle: Will the UK join the euro zone ?
|There has been a lot of talk about the UK joining the European Economic and Monetary Union (EMU) and the benefits for this membership; some may see it as primarily a technical measure to facilitate trade with other members of the EU, others as a major step towards greater economic and political integration.
The main economic benefits to EMU membership would come about as reduced transaction costs and lower exchange rate volatility might encourage a strong expansion in UK trade with continental Europe.
Also the benefit that membership of EMU would have on the British economy is stability, both externally and internally. Externally, British exporters and importers would benefit from the stability that the elimination of exchange rates between Britain and the rest of the EU would bring. Currently, over 50 percent of British exports go to the euro zone. New opportunities would open up if British exporters were freed of the financial cost of exchange rates and the economic unpredictability caused by currency fluctuations in Britainís markets.
Although there are many advantages to Britain joining the euro, there are also key conditions which need to be achieved; these conditions were set out in October 1997 and re-stated by Blair in February 1999.
* Convergence: Even if there are long-term benefits from EMU, are business cycles and economic structures compatible as to let the UK live comfortably with euro interest rates on a permanent basis?
* Jobs: Will joining EMU help to promote higher growth stability increase jobs availability?
* City: Will the single currency affect the competitive position of UKís financial services industry?
* Investments: Will joining EMU create better conditions for investments in UK?
* Flexibility: Is there sufficient flexibility to deal with problems that may arise?
These five economic conditions will determine whether a clear case for UK entry can be made; they will ensure the economic success of EMU and minimize the risks of adverse effect when Britain joins.
There are economic and political advantages and disadvantages for Britain in joining or staying out of the euro zone. Joining the euro would help exporters and encourage foreign investment. It would reduce inflation and interest rates, providing jobs and increased economic stability; remaining outside the euro would destabilize the exchange rate and lead to higher domestic interest rates. n
Khair Mikkawi is a financial consultant based in Riyadh. He contributed this article to The Star