City of London School – extra information The European Monetary Union (Euro or Single Currency)

Joining the Single Currency What you must show before entering the Euro Zone   Price stability, measured according to the rate of inflation in the three best performing Member States; Long-term interest rates close to the rates in the countries with the best inflation results; An annual budget deficit which does not exceed 3% of gross domestic product (GDP) and total government debt which does not exceed 60% of GDP or which is falling steadily towards that figure; Stability in the exchange rate of the national currency on exchange markets The exchange-rate mechanism of the European Monetary System requires this stability to be demonstrated and sustained for two years.

Why did it start? Needed to reduce uncertainty and volatility of currencies needed to bring national monetary and fiscal policies more together needed to reduce use of exchange rate as macro tool Needed to control money expansion within member states needed to control expansion on money stock v competitive de-valuations Started with ERM

Convergence Criteria amount of money owed by a government - known as the budget deficit, has to be below 3% of Gross Domestic Product (GDP) - the total output of the economy. The total amount of money owed by a government, known as the public debt, has to be less than 60% of GDP. The public debt is the cumulative total of each year's budget deficit. Countries should have an inflation rate within 1.5% of the three EU countries with the lowest rate. This was supposed to push down inflation rates and lead to more stable prices. Long-term interest rates must be within 2% of the three lowest interest rates in EU.  Exchange rates must be kept within "normal" fluctuation margins of Europe's exchange-rate mechanism.

The Euro Fixed exchange rates from 1999 Started 2002 Transaction costs reduce uncertainty transparency of prices encourage mergers BUT what of initial costs? Role of ECB loss of control of economic/political decisions problems with expansion

Gains and Losses Gains? – one catalogue price, one bank account, less formalities, stability, enhanced competition as prices remain stable, integrated bond markets, stricter discipline in tax issues BUT Loss of economic sovereignty Asymmetric shocks Lack of convergence – two speed Union? Different labour market regulations Different growth rates What if one country gets out of synch? What if monetary flexibility required?

Gains and Losses Structural differences between countries – we export 52% to EU, Germany 56%, France 63% Different housing market – mortgage debt in UK = 57% of GDP, 33% within rest of EU More vulnerability to oil price hikes? Can it be sustained as enlargement continues? Can Regional Policy cope Can the poorer nations be accommodated?

Will it survive? Will probably depend on? Competitiveness on economy (price/non-price), spare capacity, financial resources, Knowledge of market, distribution systems, strength/stability of Euro, affect of joining Euro on macroeconomic management, loss of sovereignty, implications for UK business, price at which we join (ERM memories).

The future Slovenia now a member Soon Cyprus and Malta Then Slovakia, Hungary Then Baltic States By next decade probably UK and Sweden outside it – Denmark tracks it anyway