Economic and Political reasons for not joining the Euro Essay

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It is more for political grounds instead than economic 1s that the UK and Denmark have non yet introduced the euro. The authoritiess are in favor of EMU rank in rule, but they can non be assured of public support in a referendum. The several populations are concerned about the loss of national individuality and pecuniary decision-making.

Denmark fulfils all the Maastricht standards as things stand today. The job for the UK is the exchange rate standard, which requires smooth engagement in the Exchange Rate Mechanism II ( ERM II ) for at least two old ages before the convergence trial.

UK and Denmark negotiated an “ opt-in ” clause in the EC Treaty. They have managed to remain outside EMU without sing big disadvantages. However, they do non bask the specific benefits of EMU such as the fosterage of trade and investing brought about by the riddance of exchange-rate hazards with EMU spouse states, the decrease of dealing costs and engagement in a big und liquid fiscal market.

The determination whether to fall in the euro is one of the most of import economic and political issues likely to face the UK over the following few old ages.

Economic Reasons against following the euro

The eroding of national economic sovereignty is the overruling statement against the euro.

Once UK articulation, it can non put its involvement rates, in line with the demands of the national economic system, and sterling will no longer be a cardinal accommodation mechanism. The effects could be really detrimental: instability, lower growing, higher unemployment and economic diminution. Some believe that taking the United Kingdom ‘s ability to put its ain involvement rates would hold damaging effects on its economic system. One statement is that currency flexibleness is a critical tool and that the crisp devaluation of Sterling in 2008 was merely what Britain needed to rebalance its economic system.

Euro land is non an ‘optimal currency country ‘ .

For a pecuniary brotherhood to be successful, the undermentioned cardinal conditions must be satisfied: pay flexibleness, labour mobility, and a sufficiently big cardinal budget to counterbalance states and parts that are disadvantaged. Unless these conditions are loosely met, the costs and drawbacks of a individual currency could greatly transcend the benefits. When one examine these conditions, it is clear that Euro land is non an ‘optimal currency country ‘ . The labor markets are reasonably stiff, labour mobility is limited, and the cardinal EU budget is less than 1.3 % of GDP.

If the UK joins the euro, failure to set may hold inauspicious effects.

If, one time inside the euro, the UK experiences a daze, or underperforms the others in term of productiveness or unit labour costs, the economic system may endure decreased growing and higher unemployment.

Joining the euro will be dearly-won for many concerns.

If UK joins, the physical transition from sterling to euros will affect ample costs, peculiarly for Bankss and retail merchants. The Government is improbable to cover most of these costs. In many instances the concerns affected will be SMEs, which will non deduce direct benefits from the acceptance of the euro.

A one-size-fits-all pecuniary policy is harmful.

Given the deficiency of existent convergence in Euro land, it is extremely likely that cyclical tendencies and force per unit areas will frequently vary well as between different members. Therefore, a common involvement rate that may be appropriate for Euro land as a whole will be the incorrect rate for some single members. This fact partially accounts for Euro land ‘s hapless growing public presentation since 1999, peculiarly that of Germany.

Short-run involvement rates, place ownership, and mortgage loaning are comparatively more of import in the UK than in Euro land.

Although more UK loaning is now longer term and at fixed rates, a big proportion of loaning ( both to persons and concerns ) is still based on short-run, drifting, involvement rates. Consequently, alterations in pecuniary policy could hold a more unsettling and destabilizing consequence on the UK ; and, because UK place ownership is comparatively big, involvement rate rises could bring forth inauspicious political reactions.

Inside the euro, structural rigidnesss are more likely to distribute to the UK.

The euro will doubtless promote greater revenue enhancement coordination and more centralization in assorted policy countries. However, the chief ground why the UK has accepted steps such as the societal chapter or the on the job clip directive has been the rank of the EU, instead than of the euro. If UK remains more flexible and competitory than its trading spouses, the euro may profit it and the UK could be a successful member.

If UK joins, it may be affected by Euro land ‘s immense pension liabilities.

Though UK pension liabilities are reasonably modest, Euro land ‘s immense liabilities may hold inauspicious long-run effects on the UK. While the UK can non be forced to finance German or Italian pensions, it may endure through higher involvement rates.

Inside the euro, the ‘growth and stableness treaty ‘ will halter the UK.

This treaty, which constrains the euro ‘s members ‘ financial freedom, will be peculiarly harmful for the UK. The Government ‘s financial programs, to finance much of its ambitious additions in public investing through adoption, will conflict with the treaty ; but these programs are justified, given the UK ‘s low public debt.

Joining will make serious hazards for sterling.

One major hazard is that Britons may lock themselves into the euro with a grossly over-valued exchange rate, therefore exposing the British economic system to a competitory disadvantage. Alternatively, in order to avoid this hazard, the governments may seek to weaken sterling intentionally and, in making so, cause rising prices and economic instability.

The Bank of England ‘s MPC is better structured, more effectual and more crystalline than Euroland ‘s ECB.

The record of the ECB has been hapless. It has shown a deflationary prejudice and, in the face of a major planetary downswing, it has eased policy excessively small and excessively tardily. If UK join the euro, the latter will hold to accept an inferior pecuniary model.

Political Reasons

The authorities of former Prime Minister Tony Blair declared that “ five economic trials ” must be passed before the authorities could urge the UK fall ining the euro and promised to keep a referendum on rank if those five economic trials were met.


The UK Government has announced that any move to the 3rd phase of EMU will depend on five economic trials being met:

Convergence of concern rhythms: Business rhythms in the euro zone and the United Kingdom must be compatible. The appraisal will concentrate on economic indexs such as rising prices, involvement rates, the end product spread and the existent effectual exchange rate with a position to long-run convergence.

Flexibility: The UK economic system must be flexible plenty to guarantee that any asymmetrical dazes can be absorbed by, for illustration, labour-market flexibleness and mobility and by financial policy.

Investing: UK engagement in the individual currency must advance investing ( foreign or domestic ) in the long term.

Fiscal services: EMU must better the competitory place of the UK ‘s fiscal services industry, peculiarly in London.

Growth, stableness and occupations: Electromagnetic unit must hold positive effects on employment and growing, measured by the impact on UK foreign trade, monetary value derived functions and macroeconomic stableness.

They are in add-on to the formal standard laid down in the Treaty. An appraisal of British rank based on five economic trials was published on 9 June 2003 by Gordon Brown, when he was Chancellor of the Exchequer. Though keeping the authorities ‘s positive position on the euro, the study opposed rank because four out of the five trials were non passed. However, the 2003 papers besides noted the considerable advancement of the UK towards fulfilling the five trials since 1997, and the desirableness of doing policy determinations to accommodate the UK economic system to better fulfill the trials in future. It cited considerable long-run benefits to be gained from eventual, providentially conducted EMU rank. A determination to follow the individual currency is hence non presently in the UK national involvement, harmonizing to studies from the Treasury.

The UK would besides hold to run into the EU ‘s economic convergence standards ( Maastricht standards ) , before being allowed to follow the euro. Presently, the UK ‘s one-year authorities shortage to the GDP is above the defined threshold. The authorities committed itself to a triple-approval process before fall ining the Eurozone, affecting blessing by the Cabinet, Parliament, and the electorate in a referendum.

Gordon Brown, Blair ‘s replacement, ruled out rank in 2007, stating that the determination non to fall in had been right for Britain and for Europe.

In the UK General Election 2010, the Broad Democrats increased their portion of the ballot, but lost seats. One of their purposes was to see the UK rejoining ERM II and finally fall ining the Euro, but when a Coalition was formed between the Liberal Democrats and the Conservatives, the Liberal Democrats agreed that the UK would non fall in the Euro during this term of authorities.

Why is the exchange rate set between the euro and the lb before fall ining the euro so of import?

The rate at which the UK might fall in the euro is of import because this would find comparative monetary values. If the UK joined at excessively high a rate, it would intend that exporters would happen that their monetary values had efficaciously risen doing them less competitory whilst imports would look cheaper. The break to the competitory place could hold long-run effects as concerns would hold to happen ways of recovering the fight that they had lost. This could be hard – particularly in the instance of fabrication industry – when borders might be already really tight and there is non much room for bettering efficiency and productiveness.

If UK joined at excessively low a rate, the opposite place would originate – imports would go more expensive, therefore increasing concern costs but exporters would see some benefits in footings of improved monetary values. The effects in both instances is non ‘real ‘ in the sense that the monetary values received by both importers and exporters would non needfully reflect the resources used in the production of the goods and services concerned.

In June 2003, Gordon Brown stated that the best exchange rate for the UK to fall in the euro would be around 73 pence per euro ( On 26 May 2003 the Euro had reached 72.100, a value non exceeded until 21 December 2007 ) . In April 2008, the euro rose to 80.610. It was 80.650 on 5 Nov 2008 and peaked at 97.855 on 29 December 2008. With the impact of the Global fiscal crisis of 2008 on the British economic system: failing Bankss, immersing UK belongings values and the lb sterling at ?0.8598 ( a‚¬1.1631/? ) against the euro on 19 November 2008, some British analysts stated that following the euro was far preferred to any other possible solutions for Britain ‘s economic jobs. On 29 December 2008, the BBC reported that sterling had reached approximately a‚¬1.023/? , due to more hapless economic prognosiss. This study stated that many analysts believed that para with the euro was merely a affair of clip.

During 2009, the value of the euro against the lb fluctuated between 0.96100 on 2 January and 0.84255 on 22 June. On 28 September 2010 the euro closed at ?0.84985 ( a‚¬1.1767/? ) against the euro. The failing and the volatility of the lb have raised concerns for the costs it entails for British consumers at place, and Britons life or going abroad. On the other manus, a study in Britain ‘s Daily Telegraph has argued that the high euro has caused jobs in the euro zone outside Germany. The broad Democrats have expressed involvement in seeing Britain fall in the euro in the long term.


The issues involved are clearly really complex. Joining the euro for the UK entails monolithic hazards. Equally, remaining outside the euro for good besides involves serious dangers. The immediate hazards for the UK, ensuing from losing the ability to put its involvement rates in line with its ain demands and locking sterling for good, must be weighed against the more long-run benefits produced by greater exchange rate stableness and increased competition and dynamism unleashed by the euro.

Occupations: 3.5m UK occupations depend on trade with EU states – and 60 % of exports. UK export more to Belgium than Japan and merely 16 % of goods go to the USA. Fluctuating exchange rates mean hazard for concerns which export their goods. The Euro takes away that hazard – and the cost of sing against it. When people talk about salvaging the lb, they should do certain it ‘s non at the disbursal of their occupation!

Monetary values: Many people fear that monetary values will lift if UK switches to the Euro. Evidence from the Euro zone, shows that though some monetary values were rounded up, others were rounded down, the overall consequence on rising prices being minimum. In the long term, the Euro will make competitory force per unit area, as it will be easier to compare monetary values across boundary lines and store about for cheaper providers. Monetary values should fall as a consequence.

Investing in the UK: Many foreign companies invested in the UK to hold entree to the EU ‘s common market. But research shows that some foreign makers, hardest hit by the strength of the lb, are exchanging new investings to other states. Investing in the UK fell by 15 % in 2000, while it increased by 38 % in the Euro zone, France being the most popular finish.

Academic research on the consequence of an entry on the UK economic system has by and large found that it would hold a positive consequence on the British economic system. The most apparent impact would probably be a positive consequence on trade with the other members of the Euro zone. It could besides hold a stabilising consequence on the stock market monetary values in the UK. A simulation of the entry in 1999 found that it would hold had an overall positive, though little, consequence in the long term on the UK GDP if the entry had been made with the rate of exchange of the lb to the euro at that clip. With a lower rate of exchange, the entry would hold had more clearly a positive consequence on the UK GDP. A 2009 survey about the consequence of an entry in the coming old ages finds that the consequence would be likely to be positive, bettering the stableness for the U.K. economic system.

However, the Government ‘s insisting that the determination will be determined merely by economic considerations lacks credibleness. For some people, the most powerful statement against connection is the fright that it may take to political brotherhood. For those back uping entry, many of the economic hazards of remaining out ( e.g. discriminatory regulations and inauspicious effects on foreign investing ) are every bit driven by political relations. Ultimately, merely wider political considerations, including a ‘vision ‘ of UK long-run function in Europe and an appraisal of the deductions of remaining outside for good, may finally carry the British people to fall in.

Some observers argue that the five trials are now adequately met and that a stable exchange rate would be good in covering with the dazes to the system following the fiscal crisis.[ 1 ]Others argue that Britain is still better off with a flexible exchange rate and eurozone involvement rates would non needfully be appropriate for the UK economic system – the UK now has lower involvement rates than the eurozone.[ 2 ]Would the UK be able to carry through the conditions of the SGP at least every bit good as the bing members? Given that the Commission forecasts that the UK ‘s shortage will be 8.8 per cent this twelvemonth and 9.6 per cent in 2010, Britain is a long manner from run intoing the SGP standards on budget shortages ( although its overall debt/GDP ratio remains a long manner below other eurozone members such as Belgium and Italy ) . However, these are all inquiries which merit composures and rational argument. Although euro rank is clearly non on the political docket of either of the chief parties ( and so is smartly opposed by the Conservative Party ) , their reluctance to prosecute with the issue now need non, so should non, preclude a proper appraisal of what is in the UK ‘s involvement over the longer term given the current economic state of affairs and the chances for the future European and planetary economic system.

March 2009

Note: the italic portion I is non include. Dunt no wher and how to set it..take a expression if it is important..some points hv already been included..


Denmark uses the krone as its currency and does non presently use the euro, holding negotiated an opt-out from engagement under the Edinburgh Agreement in 1992. However, a referendum on the debut of the euro is planned before the following national election, due in 2011.

The Maastricht Treaty originally required that all EU member provinces except the UK join the euro. However, following a referendum on 2 June 1992 in which Danes rejected this pact, Denmark negotiated the Edinburgh Agreement, under which Denmark was besides allowed to opt-out from euro zone rank, which was accepted in a referendum on 18 May 1993. As the consequence Denmark is non required to fall in the euro zone.

The stipulations for Denmark to derive accession to EMU are to run into the convergence standards and witness a positive referendum.

In contrast to Sweden and the UK, Denmark has participated in the ERM II since the start of EMU in 1999.

There has been a narrow fluctuation set of +/- 2.25 % for the exchange rate of the Danish krona ( DKK ) , which has kept near to the cardinal rate ( DKK 7.46/EUR ) . Given the stable development of the DKK to the euro,

Denmark easy meets the exchange rate standard. Sing pecuniary policy, Denmark behaves de facto as if it were already a portion of EMU, nevertheless with none of the advantages of the euro. The Danish cardinal bank has more or less to follow the pecuniary policy of the ECB. The staying little exchange rate hazard is associated with slightly higher involvement rates than in the euro zone along the whole scope of the output curve.

However, Denmark meets all five standards.

Convergence standards

Inflation rate 1

Government fundss

ERM II rank

Long-run involvement rate 2

one-year authorities shortage to GDP

gross authorities debt to GDP

Reference value 3

max 3.2 %

max 3 %

max 60 %

min 2 old ages

max 6.5 %

A Denmark ( July 2009 )

0.7 % [ 2 ]

-3.6 % 4 [ 3 ]

30.0 %

joined ERM II on 1 January 1999

4.42 % [ 4 ]

A A A A A standards fulfilled

A A A A A standards non fulfilled 1 No more than 1.5 % higher than the 3 best-performing EU member provinces. HICP rate as published by the ECB.

2 No more than 2 % higher than the 3 best-performing EU member provinces.

3 Valuess from May 2008 study [ 2 ] . To be updated each twelvemonth.

4 Negative value is a excess.

A referendum held on 28 September 2000 to make up one’s mind whether or non Denmark would fall in the individual currency and replace the krone with the euro. The consequence was 53.1 % to 46.9 % against following the euro with 87.6 % of eligible electors.

The grounds were wholly political, arising from the Danes ‘ deep frights about the EU. The two most popular grounds for voting “ no ” in the referendum were the fright of “ more integrating in Europe ” and the want to “ continue the Danish individuality ” .

Those in favor of acceptance of euro

The “ Yes ” cantonment, led by the regulating Social Democratic Party, tried to convert electors to back up the euro by warning that staying outside Euroland threatened a fiscal crisis and would stand for a far greater danger to societal disbursement. PM Rasmussen told a particular conference in May, “ The greatest menace against our public assistance system is the speculators on the universe ‘s money markets who will throw themselves at us if we reject the euro. Our best insurance against this is following the common currency. ”

The chief statements found in the Yes-campaign were:

– Angstrom stronger economic system

– Prevention flight of money from the state

– Protection of the economic system

– Removing currency swings

– Boost of Denmark ‘s influence in EU

Those against of acceptance of euro

The No ballot represents a crisp refusal to the Danish authorities and the full EU political constitution. The widespread designation of the societal additions of the working category with a defense mechanism of the Danish province and its currency is the political duty of groups such as the former Stalinists of the Socialist People ‘s Party ( SPP ) and was successfully exploited by the utmost right wing and racist Danish People ‘s Party ( DPP ) . It enabled the DPP to proclaim the consequence as a triumph for patriotism and, “ a really good signal to the political rightness [ anteroom ] in Denmark to decelerate down the political integrating in Europe, and say that we still want the single provinces. ”

The “ No ” run presented the euro as a menace to societal services and life criterions, which could merely be alleviated by keeping Danish independency to make up one’s mind its ain revenue enhancement and public assistance degrees. This set the docket for the full referendum, coming as it did following the fuel revenue enhancement protests throughout Europe that attracted popular support due to widespread discontent with the lifting indirect revenue enhancement of working people.

The chief statements found in the No-campaign were:

– The eroding of Danish sovereignty

– Increasing European bureaucratism

– Social welfare cutbacks

– Increased in-migration from less comfortable EU Member States

Decision of referendum 2000

Due to the G7 intercession prior to the Danish referendum, Bloombergs, the fiscal bureau, noted, “ the hebdomad before the ballot has seen a co-ordinated and so far successful intercession to bolster the euro has been a asset for the Yes run. But the hebdomads before that the currency was droping to new depressions against both the dollar and hankering. That made it look a currency in lasting crisis. It was no happenstance that as the euro sank in value, so did Danish support for the euro. ” But the menace of G7 intercession seems to hold scared off speculators for the clip being.

The speculators ‘ most obvious following mark would be the Danish krone, which had been fixed against the German grade and so the euro after it was born in 1999. As a precautional move, Denmark ‘s cardinal bank nudged up involvement rates by a half-point to 5.6 % . Central bank governor Bodil Nyboe Andersen pledged to keep the Danish currency ‘s value. “ The fixed exchange rate policy has served Denmark good for the last two decennaries, and it is highly of import that this policy be maintained unchanged, ” Andersen said.

Ironically, Denmark ‘s exchange rate policy may hold played a little but important function in act uponing electors to reject the euro. Because the exchange rate is fixed, politicians like Prime Minister Rasmussen who supported the euro had a difficult clip jointing the economic instance for connection, particularly after a commission of economic experts known as the Wise Men said in a study that there would be no important economic alterations under the euro.

Obviously, the timing of the referendum was incorrect and premature. The ballot should hold taken topographic point after the debut of the euro as a “ existent ” currency. In fact, the smooth acceptance of euro hard currency in early 2002 has well changed public sentiment in Denmark. In June 2002, a bulk of about 59 % was in favor of following the euro, and only34 % against, giving fresh support for argument on EMU entry ( see Chart1 ) .

On 22 November 2007, the freshly re-elected Danish authorities declared its purpose to keep a new referendum on the abolishment of the four freedoms, including freedom from the euro, by 2011. Rasmussen besides said he would seek a “ noticeable decrease of income revenue enhancements ” and improved conditions for asylum-seekers in Denmark as he presented the authorities ‘s platform for the following four old ages.

Denmark was expected to vote on whether to fall in the euro in 2008 harmonizing to Rasmussen ‘s statement, but due to the consequence of the Irish Lisbon referendum, the argument was postponed.

Due to the economic crisis of 2008, Rasmussen expressed that Denmark is at a disadvantage being outside the eurozone. His thought of Denmark fall ining the eurozone was supported by Peter Straarup, general director of Denmark ‘s biggest commercial bank, Danske Bank.

On May 13, 2009, Danish PM Rasmussen confirmed a referendum on the euro will be held before the following general elections ( due in 2011 ) . At the same point, he said that Denmark was already utilizing the euro ( because of the currency nog ) ; merely they have decided to name it “ danske kroner ” . On October 30, 2009, he repeated this pledge, stating “ The euro ensures political and economical stableness in Europe and the current fiscal convulsion makes it apparent that Denmark has to fall in the euro. ” A referendum before the following elections seemed nevertheless less likely due to a high degree in budget shortage.


If Denmark were to follow the euro, the pecuniary policy would be transferred from the Danmarks Nationalbank to the ESCB. In theory this would restrict the ability of Denmark to carry on an independent pecuniary policy, nevertheless a survey of the history of the Danish pecuniary policy shows that, “ while Denmark does non portion a individual currency, its cardinal bank has ever tracked alterations made by the ECB ” . As a effect the Danish pecuniary policy is in pattern already set by the determinations of the ECB. However, Denmark does non hold any representation in the ECB way. This motivated the support for an acceptance of the euro by former Prime Minister Rasmussen: “ De facto, Denmark participates in the euro zone but without holding a place at the tabular array where determinations are made, and that ‘s a political job ” . Furthermore the ECB does non support the Danish krone exchange rate. This is done by Danmarks Nationalbank, and the Danish authorities. In a crisis it can be tough for a little state to support its exchange rate.

The expected practical advantages of a euro acceptance are a lessening of dealing costs with the eurozone, a better transparence of foreign markets for Danish consumers, and more significantly a lessening of the involvement rates which has a positive consequence on growing. However, when fall ining the euro, Denmark would abandon the possibility to follow a different pecuniary policy from the ECB. If of all time an economic crisis were to strike specifically the state it would hold to trust merely on financial policy and labour market reforms.

The euro is extremely of import for the Danish economic system since 43 % of its exports are to and 50 % of its imports are from the euro country. If Denmark joins EMU, trade and foreign direct investing will profit from the riddance of the exchange rate hazard vis-a-vis the euro. The concern rhythm in Denmark is closely in line with those of the remainder of the EU.

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