The European Monetary Union

France and the United Kingdom have very different approaches when it comes to monetary policy. France is a member of the Eurozone and uses the Euro as their currency, with the European Central Bank being their central bank. The United Kingdom has decided to stay out of the European Union and stick with their currency of the Pound. Their central bank is the Bank of England located in London. Both of these countries are 2 of the biggest, most powerful countries in the European Union so they both have quite the impact on how the European Union behaves.

Both France and the United Kingdom are members of the Economic and Monetary Union of the European Union. While France is a full member of the Eurozone, the United Kingdom is only a member of the Economic and Monetary Union of the European Union with an opt out from the Eurozone. The European Central Bank in June of 1998 and in December of that year the conversion rates between the eleven national currencies and the Euro were established. There was then a 3 year transition phase where the Euro was actual currency and so were the national currencies, although the national currencies had ceased to being printed and legally ceased to exist.

The function of the European Central Bank is to administer the monetary policy of the countries in the Eurozone. The current President is Mario Draghi, the former governor of the Bank of Italy. The primary objective of the European Central Bank is to keep inflation and deflation low, or to maintain stable prices throughout the Eurozone. The European Central Bank has the exclusive right to authorize the printing or issuing of euro bank notes. Member states can issue Euro coins but the amount has to be authorized by the European Central Bank before they can.

One of the last functions of the ECB is to regulate the financial and banking market in the member states. This is shown when they bailed out the banks with billions of euros during the financial crisis in 2007. The set up of the ECB is like that of a corporation, there being shareholders and stock capital. The capital 5 billion euros held by each of the national central banks of the member states. So in this sense when it comes to Frances monetary policy, they are only a shareholder in the establishment that decides it. This drastically diminishes the amount of sovereignty they have when it comes to monetary and fiscal decisions.

Established in 1694, the Bank Of England is the second oldest central bank in the world behind Sweden’s. It was established to act as the English Government’s bank and to this day it still acts as the United Kingdoms central bank. The Bank was privately owned until its in a sense “nationalization” in 1946. Today while it acts on behalf of government it is an independent organization much like the Federal Reserve in America. The Bank of England is one of eight banks that has the power to issue banknotes in the United Kingdom, but the bank has a monopoly on that power in England and Wales.

The bank also regulates the commercial banks in Scotland and Northern Ireland that issue banknotes in those regions. The United Kingdom had the opportunity to join the Eurozone but it opted out when The Economic and Monetary Union replaced national currencies with the euro. The United Kingdom enabled this opt out in the initial negotiations of the Maastricht Treaty. The United Kingdom was hesitant to join the risky new currency so they devised a plan as when they would potentially join the Eurozone. It would be based on five economic tests. The last time these tests have been assessed was in 2003 and only two of the tests had been met.

Despite this, the current Prime Minister, David Cameron, has recently shot down the possibility of joining the Eurozone. He says in an interview from January 2011: A strong and successful Eurozone is in Britain’s interests. We want the countries of the Eurozone to sort out the difficulties they have and we won’t stand in the way as we do that. Indeed, we will be a helpful partner in making sure that happens. But let me again be clear – that does not mean that Britain should be drawn into new mechanisms or new procedures or have to give up new powers.

He then goes on to make an analogy towards the United States and shows how being successful in a fiscal and monetary union can in a way limit your prosperity: We understand that if you are in a single currency you do need to take steps to better co-ordinate and harmonize some of the things you do together. Indeed, that was one of the reasons I didn’t want to join the euro in the first place, because I didn’t want that to happen. I don’t think you can have a single currency for a very long time without having more coordinated fiscal policy.

In the US if Texas has a good year it pays more in taxes it gets less in public spending. They have a fiscal union to go with the single currency – the dollar. This was the reason for me not joining the euro. This outlines some of the cons that come along with being in the Eurozone that France has to deal with. Some of the worries that go along with the Eurozone is the amount of diversity throughout it. The language barrier in Europe will create more problems in a fiscal union than would happen in a union like the United States.

There is also a very wide range of economic performance where there could be areas of deep depression and areas of great prosperity that cannot be intertwined easily due to the cultural and language barriers. This affects all of the countries in the Eurozone so France is affected as well. Another con that France has to deal with is that they are obliged to a stability pact and must meet the Maastricht criteria regardless of how their economy is. So if they are in a recession or want to get their economy to start picking up, they aren’t allowed to lower their taxes.

If there is some reason that they want to borrow money from another country. They can’t do any of these things if it doesn’t reach the deficit criterion. The ECB sets interest rates for all of the countries in the Eurozone despite there being very different economies within it, country to country. This is an area where the United Kingdom has a very big advantage as the interest rates more reflect the actual market throughout the country. Regardless of the method, a central bank setting artificially low interest rates will create an artificial boom, thus creating a bubble and eventually a bust.

This is an unavoidable economic law and this is unavoidable in both countries, France and the United Kingdom, as both of them have central banks that set artificial interest rates. But in the UK it is more controlled and does not get as out of touch from the country itself as it does in the Eurozone. So the ECB sets interest rates based on the whole Eurozone, not just France. These all show an overbearing principle, which is the loss of national sovereignty. It’s putting together unequal economies and put universal rules over all of them.

There will obviously be inconsistencies in how the regulations and rules affect each country, some mooching off of the others or having policies that favor them. France is taken advantage of in some areas and benefits in other areas. One other disadvantage that France has pretty much gotten through already is the transition they had to go through changing to the Euro from the Franc. All businesses had to spend an estimated amount anywhere from 1. 7 billion to 3. 5 billion francs educating customers, changing labels, changing software, educating workers and other inconveniences.

Some of the advantages that France has over the United Kingdom can definitely compete with the cons and make up for a good, healthy debate in the United Kingdom as to what they should do. One advantage is that it enhances the credibility of the currency. The more people use a currency the more credible it is, so in turn the euro is more credible than the franc was. This gives foreign businesses more confidence to invest and it gives them more confidence in the future for doing business in those countries.

Having a single currency also reduces the amount of red tape and conversion that happens when going country to country. It is estimated that an average European family would lose 40 percent of their money in transaction charges alone. One of the biggest advantages would be lower interest rates as all of the countries in the Eurozone would be influenced by the German monetary credibility. The stability pact will also force countries in the Eurozone to be fiscally responsible, which will enhance the Eurozones credibility. This leads to more investments, a higher number jobs and lower mortgages for France.

For some of the more statistical numbers associated with The European Central Bank and the Bank of England I will compare some of their figures. As of this year the Bank of England has reserves of 322,831,000,000 pounds and a base borrowing rate of 0. 5 percent. The European Central Bank has reserves of 526,000,000,000 euros and a base borrowing rate of 0. 75 percent. While the European Central Bank doesn’t have any gold reserves, the Bank of England has an estimated 156,000,000,000 pounds worth of gold. That is, pounds as in the currency.

This gives the Bank of England more security since there is something in the reserves and they have something that has an actual worth as opposed to paper currency that is faith based. The conversion rate between a pound and a euro is 1. 2234 euros to every pound. The inflation between the two currencies is hard to determine since modern day methods of determining inflation doesn’t include the prices of food or energy, two of the most rapidly increasing areas when it comes to prices. But according to these methods, inflation rates for the Pound is 2.

7 percent for the month of November. The rate of inflation for the Euro 2. 2 percent for the month of November. All in all I would say that the two monetary policies executed by the Bank of England and the European Central Bank effect the United Kingdom and France pretty similarly. There are some advantages to a country having its own central bank as opposed to being in a union because it strengthens that countries national sovereignty. But there are also advantages to being in that fiscal union, like trade and commerce being much easier between those member states.

Either way, France and the United Kingdom will continue to be huge economic players in the decades to come and it will be interesting to see how each of them adapt their own monetary policies and how it effects the global economy. Bibliography Wintour, Patrick. “David Cameron vows to keep Britain out of euro plans. ” Guardian. N. p. , 13 Jan. 2011. Web. 5 Nov. 2012. “Pro’s and Con’s. ” BBC News. N. p. , 21 Nov. 1997. Web. 5 Nov. 2012. Taylor, Paul. “Using Game Theory to Predict the Euro’s Future. ” New York Times. N. p. , 23 July 2012. Web. 5 Nov. 2012. European Union. N. p. , n. d. Web.

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