Economic and political issues surrounding EMU

EMU stands for Economic Monetary Union and involves replacing the currencies of participating European countries with a single currency – the euro. But this will mean much more than just swapping one currency for another, it will affect businesses both outside and inside countries that join the single currency. Monetary union will have both positive and negative effects on business, this assignment sets out to explain and explore the economic and political issues surrounding EMU and their effect on a UK business.

This report is divided into three main sections: * The first section sets out the broad principles of EMU and explains the origins, entry criteria and timetable, it also looks at the current policy of the UK government. * Section two looks at the effect of the Euro on J Sainsburys plc. on two separate scenarios, firstly if the UK joined the Euro and secondly if the UK didn't join. * Section three concludes which political party would produce the best situation for J Sainsburys.

1. 1 Why have EMU? If you started with i?? 100 in the UK and then went on to visit each EU country exchanging your money for the local currency each time by the time you back to the UK you would have no money left without having spent a penny of it. It would all have been absorbed in bank fees, commission and exchange rate fluctuations between all the member countries. This is the same for European currencies. The potential economic benefit for a single currency is very clear.

Economic Monetary Union is designed to maximise the positive effects of having a European single market by permanently fixing exchange rates between European member states and eliminating the expense and problems of exchanging currencies between them. On a more global footing the three major anchor currencies are the US dollar, the Japanese Yen and the German Mark, but the fact that the German Mark lacks the economic weight to support currency shifts between the three has caused problems with the world economy in the form of exchange rate instability.

EMU would create a currency, the euro, which would equal the US Dollar in the size of the economic area it represents and would have the economic weight to add stability to the global economy. The best way to achieve these things is to have a single currency for Europe 1. 2 History The end of the second world war brought enormous change to Europe and made people realise the terrible price of the traditional linguistic, religious and political rivalries that have existed on the continent for centuries.

Since 1945 the European nations have continually increased their desire for more co-operation and peaceful co-existence to the point now where the prospect of armed conflict between European states seems impossible. European politics has shifted away from defence policy and trying to influence the balance of power in Europe to policies more concerned with the wealth and welfare of it's citizens, this naturally lends itself to the politics of compromise and negotiation rather than conflict.

This can best be expressed by this quote from Altieto Spinelli, one of the architects of European integration. "[a] major transformation . . . has occurred in the political consciousness of Europeans, something which is completely new in their history. For centuries, neighbouring countries were seen as potential enemies against whom it was necessary to be on one's guard and ready to fight. Now, after the end of the most terrible wars in Europe, these neighbours are perceived as friendly nations sharing a common destiny. "

(the government and politics of the EC, Neill Nugent) It was on this background that 750 prominent Europeans held a congress at the Hague calling for the "nations of Europe to create a political and economic union" this led to the signing by 10 states of the statue of the council of Europe in May 1949. Article 1 on the statute read: " The aim of the Council of Europe is to achieve a greater unity between its Members … facilitating their economic and social progress. " The European Economic Community (EEC) was created in 1957 with the signing of the treaty of Rome.

The founder states were France, West Germany, Italy, Netherlands, Belgium and Luxembourg. The UK did not join until 1972. The purpose of the EEC can best be set out by article 2 of the treaty: "The community shall have at it's task, by establishing a common market and … to promote throughout the Community a harmonious development of economic activities, a continuous and balanced expansion, an increase in stability, an accelerated raising of the standard of living and closer relations between the states belonging to it. "

You can see here that the creation of a single European currency would be extremely beneficial to achieving the goals of the then EEC and the Werner report in 1970 highlighted this desire by proposing monetary union within 10 years. This did not happen but many other methods were tried in an attempt to achieve exchange rate stability notably the Snake in 1972 which set out to limit exchange rate fluctuations between their currencies to within a band of plus or minus 2. 25%. This system was abandoned by many countries within five years.

The European Monetary System (EMS) was introduced in 1979 and was designed to create stability in the exchange rates of European currencies, in order to do this the EMS created a European Currency Unit (Ecu) made up of a composite of European currencies and designed to provide a new 'gold standard' for comparing the value of European currencies and a common unit of account for Europe. The key to the EMS was the Exchange Rate Mechanism (ERM) which, like the snake, set out a permissible band of fluctuation again this was plus or minus 2. 25% for the majority of countries.

The ERM hit a crisis in September 1992 this has been attributed to it's vulnerability to currency speculation, the failure of member countries to be more flexible and an overvalued German Mark. (Artis and Lee 1997) 1. 3 Maastrict treaty Although talked about for many years before, EMU was finally given an economic, political and legal framework with the signing of the Maastricht Treaty in 1992. EMU is to be established in three stages: The first stage: Economic and monetary co-operation and the development of a single market. The second stage:

Closer co-operation to make the member countries economies more suitable for EMU. The setting up of the European Monetary Institute (EMI) to enable national central banks such as the Bank of England and the Bundesbank in Germany to prepare for the European Central Bank (ECB). This stage started in January 1994. The third stage: This is the introduction of the euro in those countries assessed to be ready the so called first wave. The ECB is responsible for the monetary policy of these countries including interest rates. This started on the 1st of January 1999. (www.HM-Treasury.gov.uk)