Economics of the EU Ivana Kovacevic

8/17/2019 Economics of the EU Ivana Kovacevic

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UNIVERSITY OF BELGRADE

FACULTY OF LAW

MASTER IN EUROPEAN INTEGRATION

Should UK join Euroon!"

Menthors: Branko Radulovic

Miroljub Labus

Student: Ivana Kovacevic

Wording: 5000

Index nuber: !I "0#$%"#

!ail address: ivs&kovacevic'gail&co

Belgrade( )#st March "0#5&


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Introduction

*nlike the barter( one+ ,acilitates coercial and ,inancial transactions& -he ore it

s.reads( the ore it/s recognied aong .eo.le so it 1ill be used ore in transactions& -his

akes autoaticall+ currenc+ use,ul& In that sense( the 1orld 1ould bene,it ,or having just

one currenc+( acce.table ever+1here and allo1ing ,or global trade to .roceed unencubered

1ith costl+ transactions -he exchange rate adjustents could be e,,icient 1a+ to take u.

te.orar+ ass+etries bet1een states( so it should be considered to be .riar+ otive ,or

kee.ing inde.endent currencies& 2s a conse3uence( the econoic case ,or se.arate currencies

relies heavil+ on the existence o, as+etric acro ,luctuations&"

-he .roject o, ,urther( dee.er integration in the !* is having signi,icant e,,ect on the

!* itsel, and the Meber States& -hose e,,ects can/t be seen just as i.roved

intergovernental coo.eration or strengthening the su.ranational institutions 4 as uch as

the+ have .olitical e,,ect( the+ have econoic too& ne o, the ,inal ste.s o, the !uro.ean

integration is surel+ onetar+ integration and the creation o, the !uro.ean Monetar+ *nion&

2lthough( the creation o, euro should be erit on the 62 theor+( an+ authors think that

behind cheering ,or !M* stands .olitics& -he creation o, !M* 1as seen as 7,urthering the

.olitical agenda oa a ,ederalist !uro.ean .olitical union8&) ne o, the su..orters o, this

stateent 1as Martin 9eldstein( 1ho thought that euro is unjusti,ied on econoic grounds

and that it needdee.er integration aong the Meber States s.eciall+ on taxation and labor

arket regulations;&


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an+ arguents 1ere .resented( but the ost i.ortant is that *K=s decision to sta+ outside

o, !M* is based on econoic grounds&

S.eci,icall+( in this essa+( I/ll .resent an overvie1 o, the .tiu 6urrenc+ 2rea

-heor+ in order to .resent and ex.lain criteria that I=ll later use ,or costs and bene,its anal+sis

o, the *K=s .ossible ebershi. in the !M*& -hen I=ll .resent the o.inions o, the authors

1hether !M* is ,ul,illing the 62 criteria and I=ll tr+ to inter.rete that in the light o, the

*K=s onetar+ .olic+& 2,ter .resenting the cost and bene,it anal+sis( I=ll give + conclusion

on 1heter the *K should ste. in the !uro one or not and give .ossible scenarios ,or the

,uture&

The OCA Theory – an overview

-he theor+ o, o.tiu currenc+ area is de,ined b+ an+ authors( but the ost coon

de,inition is the one that ade Mundel:8an o.tiu currenc+ area is an econoic unit

co.osed o, regions a,,ected s+etricall+ b+ disturbances and bet1een 1hich labor and other

,actors o, .roduction ,lo1 ,reel+&$ -hat kind o, area( in this case !*( consist o, di,,erent

nations( ado.ted the currenc+ 1hich is not liited b+ the borders& -he o.tiu currenc+ area

theor+ basicall+ sho1s 1hether it/s logical ,or grou. o, countries that are 1ell connected

geogra.hicall+( to abandon their national currencies and establish a ne1( coon one& -he

theor+ develo.s a batter+ o, econoic and .olitical criteria 1hich recognie that the real

econoic cost o, giving u. the exchange rate instruent arises in the .resent o, as+etric

shocks( shocks that do not a,,ect all currenc+ union eber countries& 5 Cational currenc+ is

not so long ago .erceived as one o, the essential eleents o, the state& ,ten( on the national

one+ 1e can see s+bols characteristic ,or that state 4 national heroes( ,lags( colors( coat o,

ars( etc& -he theor+ o, o.tiu currenc+ area touches that connection bet1een state and its

national currenc+& Soe countries( in order to have coon currenc+( have to develo. a

dee.er coo.eration( to achieve level o, econoic integration that 1ill .rovide the to have

coon onetar+ .olic+& -oda+( 1e are 1itnesses o, that kind o, integration 4 onetar+

integration 1ithin the !* or( in other 1ords( !uro.ean Monetar+ *nion&

State borders o, ebers o, a currenc+ area serve at the sae tie as borders o, an

62& .tialit+ is de,ined in ters o, various 62 .ro.erties( such as .rice and 1age

,lexibilit+( ,inancial integration( etc&? I, this 62 characteristics 1ere coon( the utilit+ o, the

$ Mundel( #A?#5 Bald1in R& et W+.los 6 "00?( . )5$? Mongelli 9&( 7Ce1 vie1s on the .tiu currenc+ area theories: What is !M* telling usD8( .& "


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noinal exchange rate adjustents 1ithin the currenc+ area 1ould be reduced b+ decreasing

in,luence o, shocks or i.roving its adjustent& Meber countries o, an 62 1ould look ,or

bene,its in order to outbalance costs& -here is still no si.le 62%test 1ith a clear%cut scoring

card although several authors have 8o.erationalisedE several 62 .ro.erties& 2ll 62

.ro.erties can no1 be discussed in uch greater detail&F

-he h+.othesis o, the 62 theories is that exchange rate variance soak u. as+etric

shocks& -hen( i.ortant exchange rate variabilit+ should i.l+ that shocks are as+etric(

1hile exchange rate stabilit+ ight indicate that shocks are s+etric&A -he bilateral

exchange rate behavior 1ill along 1ith econoic roudients( i, this 62 assu.tion holds&

But( 1hat i, exchange rate is stable 1hile econoic shocks are as+etricD#0 I, the 62

h+.othesis does not hold( it is obvious that there is exchange rate behavior discre.anc+ 1ith

econoic roudients& *nlike the classic a..roach( the odern versions o, the 62 theor+(

de,ines it as an econoic block consisting o, countries a,,ected s+etricall+ b+ shocks# I,

this re3uireent is not satis,ied( the exchange rate 1ill take u. as+etric shocks& In other

1ords( 1ith ,ree ,loating( a relative stabilit+ o, observed exchange rate bet1een t1o blocks

here *K and the !uro one; 1ould be an a .riori indicator o, the viabilit+ o, the

enlargeent( 1hile an i.ortant volatilit+ o, the observed exchange rate 1ould reveal the

necessit+ o, exchange rate ,lexibilit+ as adjustent tool"

Monetar+ uni,ication in ters o, the 62 theor+ in !uro.e started in #AA 1ith the

creation o, the !MS( 1hen the !6 Meber States( irrevocabl+ ,ixed the exchange rates o,

their currencies to the central .arit+ re.resented through the iaginar+ !uro.ean currenc+( the

!6*) Resulting idea 1as !xchange Rate Mechanis I& But this 1asn/t an initial ste. 4

during the "0 +ears it 1as 1orked on this idea and onetar+ integration& -he ,inal result

should be a coon currenc+& 2lthough there 1ere soe e,,orts to exaine the !MS as an

62 1ere ade( the true challenge 1as set u. a,ter #AAA& Cael+( the start o, the !M* boosted the interest ,or the debate 1hether sharing a ne1 single currenc+ sets ,ree ,orces that

bring !uro area countries closer together$

Mongelli 9&( 7Ce1 vie1s on the .tiu currenc+ area theories: What is !M* telling usD8( .&5#F Mongelli 9&( 7Ce1 vie1s on the .tiu currenc+ area theories: What is !M* telling usD8( .&)#A Lee K et Saucier G&( 8Should the *K Hoin the !uro oneD !vidence ,ro a S+nthetic 62 2ssessentE( -he!uro.ean Hournal o, 6o.arative !conoics( Jol& F( n& #( .& F)#0 Ibide .& F)## Lee K et Saucier G&( 8Should the *K Hoin the !uro oneD !vidence ,ro a S+nthetic 62 2ssessentE( -he!uro.ean Hournal o, 6o.arative !conoics( Jol& F( n& #( .& F

#" Ibide( .& F#) Getreski( .&5#$ Getreski( .&5


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-he

62 theor+ .rovides a e3uilibriu o, bene,its and costs 1heter the sharing coon currenc+

is .ro,itable ,or countr+ and region& It exaines 1hat .ro.erties decrease ,re3uenc+ o,

as+etric shocks& In that anner( the 62 theor+ develo.s criteria 1hich could be

considered to be .araeters ,or 62& I, the+ are ,ul,illed( the decrease o, the exchange rate

instruent sore& enerall+ s.eaking there are six criteria divided into the t1o grou.s 4

econoical and .olitical& -he three econoic 62 criteria are labor obilit+( o.enness to

trade and diversi,ied ex.orts& -he three .olitical criteria are: hoogeneous .re,erences

regarding the ais o, acroeconoic .olicies( existence o, trans,ers and a shared sense o,

coonalit+ o, destin+& -he authors 1hile testing this criteria on !M* deterined that !uro

one ,unctions 1ell on o.enness( diversi,ication and hoogeneit+ o, .re,erences& *nlike

.revious( the .robleatic criteria are labor obilit+ and ,iscal trans,ers& -his 1ill be

discussed ore in the ,ollo1ing section ore in relation to the .ossible *K ebershi. in

!uro one&

Eurozone as optimum currency area and itsrealtion to UK

enerall+( signi,icant ste.s 1ere ade in the light o, ,urther resolving the o.tialit+in the !uroone& In that anner( the i.roveent on the area o, ,inancial integration(


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in,lation convergence and the trade o.enness 1ere visible& n the contrar+( labour obilit+

and 1age ,lexibilit+ reained lo1( 1hile the ,iscal integration is do1ned to res.ecting the

Stabilit+ and ro1th Gact SG; rules and not to a coon ,iscal .olic+ 1hich 1ill enable

the ,iscal trans,ers to act as an absorber o, external shocks

6oon currenc+ in !uro.e is o,,ering a nuerous bene,its:

#; It reduces transaction costs

"; It i.roves the allocative e,,icienc+ o, the .rice echanis b+ reducing .rice uncertant+

); It eliinates the extree oveent in the exchange rates

$; It could .ositevel+ in,luence the cotetition because o, the greater trans.arenc+ o, the

.rices o, .roducts

5; -oda+( it tends to gro1 into the global currenc+( 1hich could .rovide ore bene,its ,or

governents&

2lthough( 1e 1itnessed the bene,its o, the coon currenc+ in !uroone( it can

create ne1 costs( such as loosing the ca.acit+ to guarantee that the outstanding stock o, the

governent bonds 1ill be al1a+s re.aid?

2s I alread+ entioned in the .revious section( the !uro one( looking strictl+ on the

,ul,illent o, the 62 criteria is not an 62( because o, the ,ailure under the criteria o, labor

obilit+ and ,iscal trans,ers& -hese criteria are ore essential de,ect ,or !uro one( and in that

anner( it 1ill have i.act on the issue o, *K ebershi.& It is clear that in case o,

!uroone( coon currenc+ is ,orcing dee.er integration 1hile it should be reversed&

*K entered the !uro.ean Monetar+ S+ste/s !xchange Rate Mechanis in #AA0( but

soon( due it 1as an issue o, .olitical controves+( it exited in #AA"& Cot soon a,ter agon+ o,

!RM( leaders o, the 9rance and eran+( 6hancellor Kohl and Gresident Mitterrand( decided

#5 Getreski( . #"#?


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to continue the negotiations on creating the onetar+ union& -he *nited Kingdo negotiated

and choose to o.t%out on this issuein Maastricht -reat+& In Hanuar+ #AAA the euro 1as

launched in virtual ,or and in Hanuar+ "00" the euro aterialised as notes and coins -he

debate in Britain has been ,ocused b+ the kno1ledge that joining the euro is in large easure

irreversible( unlike joining the !RMF In Hune "00) ordon Bro1n( at that tie the *K

6hancellor o, the !xche3uer( issued a assiove stud+ anal+sing the issue o, the costs and

bene,its o, onetar+ union ,or the *KA So( instead aking it a .olitical issue( the 3uestion

o, joining the !M* 1as strictl+ 3uestioned ,ro the econoic as.ect& It 1as ,orulated as

,ive econoic tests 4 test on econoic convergence( ,lexibilit+( investent conditions o,,ered

in the !M*( co.etitive .osition o, the *K ,inancial services industr+ and .ros.ects ,or

gro1th( stabilit+ and e.lo+ent in the !M*& -his anal+sis gave a negative result 4 *K

.assed onl+ the test o, co.etitive .osition o, the *K ,inancial services industr+( so overall

conclusion 1as that *K 1asn/t read+ to becoe eber o, !uro one& Since the cration o,

the !uro one and its o.erabilit+( the brisk debate is taking .lace aong the bussines en(

econoics( governent o,,icials and acadeics on 1heter *K should join !uroone& -he

stubbornl+ as+nchronous nature o, *K and euro%one business c+cles is there,ore o,ten said

to raise the cost o, *K .artici.ation in the single currenc+ .rohibitivel+&"0

Gro,essor Gatrick Min,ord( strongl+ o..osed the *K=s ebershi. in !uroone(

claiing that it 1ould be against British interests& 2ong the aruetation ,or *K=s joining

the !M*( one o, the ost coon ones is that transaction costs 1ould be reduced& 2lso(

there is arguent that the .rice co.arison 1ould be ,aciliated( but it has no signi,icance

1hen it coes to the case o, *K& !ssence o, the arguentation ,or joining the !M* is the

eliination o, exchange rate risk against the euro"#& !uro is a regional currenc+ and toda+

tends to be a global; 1hich has ,luctuated considerabl+ against the dollar( and it=s sure that

total exchange rate risk 1ould be decreased b+ *K=s joining the !uro one& 2n+1a+( ,inancial

arkets can decrease that kind o, risks& Regarding the contra arguentation( a ajor .roble(

according to Min,ord( is the loss o, interest%rate%setting .o1ers( since a single currenc+

i.lies a single interest rate&"" It is true that( under o.tial currenc+ conditions( the variabilit+

o, British out.ut( e.lo+ent and .rices in res.onse to shocks ight not increase&") But those

# Min,ord G&( 7Should *K join the !M*8(-he Institute o, !conoic 2,,airs( "00"( .& #A#F Min,ord G&( 7Should *K join the !M*8(The Institute of Economic Affairs( "00"( .& #A#A


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o.tial conditions do not a..ear to .ertain& Both econoic anal+sis and econoetric

odelling suggest that such variabilit+ 1ould .robabl+ be uch greater in the euro one than

1ith a se.arate currenc+&

2 single currenc+ i.lies a single interest rate( set ,or the needs o, the 1hole euro

one& *nder o.tial currenc+ conditions( variabilit+ o, *K out.ut( e.lo+ent and .rices in

res.onse to shocks need not increase& But both observation and detailed odelling suggest

such variabilit+ 1ould be uch greater than 1ith a se.arate currenc+& >aronisation is .art

o, the centralising !M* agenda/& >aronisation o, social su..ort and regulation( and tax

rates 1ell above those no1 .revailing in the *K( 1ould be ver+ daaging ,or the *K

econo+& In the ,ollo1ing section I=ll .resent the cost%bene,it anal+sis based on the 62

criteria&

Evaluating costs and benets !or UK membershipin Eurozone

-he 62 theor+ .rovides .ractical outset ,or exaining the *K/s .ossible

ebershi. in the !uro one& -he basic insight o, this literature is that t1o countries 1ill

bene,it ,ro sharing a coon currenc+ i, the icroeconoic bene,its o, lo1er transaction

costs and exchange rate risk and greater .rice trans.arenc+ exceed the acroeconoic costs

o, adjusting to countr+%s.eci,ic as+etric; shocks in the absence o, the abilit+ to set

national interest rates or the .ossibilit+ ,or the noinal exchange rate to adjust& "$ In other

1ords( it e.hasie ho1 onetar+ unions are exained on the .ractical level and in,luence

o, the literature on coo.eration( adjustent and credibilit+ o, acroeconoic ,rae1ork&

2s I alread+ entioned( there are three econoic criteria and three( ore .olitical

ones& Labor obilit+( the ,irst criterion tries to lo1er the costs os as+etric shock as uch as

it can& -he .roduct diversi,ication and o.enness ai to recognie 1hich econoic areas are

unlikel+ to be hit b+ as+etric shocks in,re3uent or oderate enough to be o, liited

concern& -he last three criteria deal 1ith ore .olitical as.ects( the+ ask 1hether di,,erent

countries are likel+ to hel. each other 1hen ,aced 1ith as+etric shocks&"5 In the next

.aragra.hs( I=ll .oint the ke+ characteristics ,or each o, 62 criteria on the *K=s econo+&

Mundell criterion: .tiu currenc+ areas are those 1ithin 1hich .eo.le ove easil+&

"$ >M -reasur+( -he ,ive tests ,rae1ork 4 !M* stud+( "00)( .&"F"5 Bald1in R& et W+.los 6 "00?( .& $##


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9irst criterion( labor obilit+( 1as develo.ed b+ Robert Mundell& -he idea is that the

cost o, sharing the sae currenc+ 1ould be eliinated i, the ,actors o, .roduction( ca.ital and

labor( 1ere ,ull+ obile across borders&"? It is assued ,or ca.ital to be obile( so this

criterion on labor obilit+ i.licates that labor need to ove aong the regions to eliinate

the .robles o, sur.lus o, deand under .roduction; and sur.lus o, su..l+ une.lo+ent;&

-he circustances are such that i, *K joins the !M*( it 1ill lose co.etitivnes in ke+

industries( but igration 1ould not ha..en as it/s .redicted& -he conse3uence 1ould be the

decrease o, the levell o, e.lo+ent& enerall+ s.eaking( having the anal+sis o, the labor

obilit+ in ind( the !uro 1ould not be o.tial( so it/s in the best econoic interest ,or *K

to sta+ outside the !uroone&

Kenen criterion: 6ountries 1hose .roduction and ex.orts are 1idel+ diversi,ied and o, siilar

structure ,or an o.tiu currenc+ area

Second criterion( .roduct diversi,ication( 1as stated b+ Kenen& It re,ers to the stateent that

currenc+ area eber countries are ore diversi,ied and ore likel+ to bear sall costs due

to abandonent o, noinal exchange rate changes aong the and ,ind e,,ective single

currenc+&

I, 1e a..l+ this criterion to the !uro( 1e can obviousl+ see that this criterion is ,ul,illed( as

the di,,erent econoies o, the !uro.ean 6ounit+ are generall+ characteried b+

diversi,ied industrial structure&"

McKinnon criterion: 6ountries 1hich are ver+ o.en to trade and trade heavil+ 1ith each other

,or an o.tiu currenc+ area&

-he criterion o, o.enness in the .tiu 6urrenc+ 2rea -heor+ 1as created b+ McKinnon&

.enness atters in the 62 theor+ because( in a sall o.en econo+( ost o, the goods

.roduced and consued are traded on international arkets& 2ccordingl+( their .rices on the

local arket are largel+ inde.endent o, local conditions and an+ change in the value o, the

currenc+ tends to be .ro.tl+ .assed into doestic .rices& When this is the case( exchange

rate changes ,ail to a,,ect either the countr+/s co.etitiveness( hence the+ are essentiall+

useless( 1hich is exactl+ the McKinnon criterion& When 1e anal+se *K trade in the light o,

"? Bald1in R& et W+.los 6 "00?( . )?0" 2brose S&( .&)


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this criterion( the coclusions sets itsel, 4 it 1ould be a bene,it ,or *K to join !M*& -he

o.enness criterion is a..lied 1idel+ in the !uroone countries& -he great role had a Single

Market .rograe( 1hich .rovided that .rices on tradeable goods becoe ore haronied

1ithin the Meber States and that /.rice%through/ coe,,icient set o,, this .rice liberalisation

1hen co.ared to other econoies& 2s *K is strong trade connections and is integrated 1ith

!uro one Meber States( the .rices o, siilar .roducts are alike to the region& In that

anner

2,ter anal+ing the econoic criteria o, the 62 theor+ on the *K( the ,ollo1ing criteria that

are about to be .resented are considered as .olitical& -hose criteria are hoogeneit+ o,

.re,erence criterion( solidarit+ criterion and the ,iscal trans,er criterion&

-rans,er criterion: 6ountries that agree to co.ensate each other ,or adverse shocks ,or an

o.tiu currenc+ area&

-he ,iscal trans,er criterion is built on idea o, risk%sharing&"F In a currenc+ area( countr+ B

su,,ers ,ro the adverse shock that hits countr+ A& It is there,ore in the interest o, countr+ B to

hel. alleviate the i.act o, the shock& ne .ossibilit+ is ,or countr+ B to send one+ to

countr+ A& Such a trans,er itigates both the recession in countr+ 2 and the boo in countr+

B( giving tie ,or the shock to disa..ear i, it is te.orar+( or to 1ork its e,,ects through

.rices i, it is longer%lasting& 2s shocks occur randol+( toda+/s .rovider o, hel. 1ill be

toorro1/s bene,iciar+& In e,,ect( such trans,ers 1ork like a coon insurance against bad

shocks& -he trans,er re.laces the need ,or noinal exchange rate to ,it so that the hock could

be co.ensated 1ith the one+ that is diverted to the a,,ected region& In order to ake

trans,er .ossible and 1ell coordinated( there is need ,or su.ranational bod+ and high degree o,

.olitical integration&Since that kind o, institution doesn/t exist( this ,ailure to eet the

criterion is .rescribed to the arguents contra joining the !M*& I, 1ould *K ever be hitted

b+ as+etric shock ( there is no develo.ed echanis ,or co.esating the loss o, the

exchange rate&

>oogeneit+ o, .re,erences criterion: 6urrenc+ union eber countries ust share a 1ide

consensus on the 1a+ to deal 1ith shocks&

"F 2brose S&( .&$


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-he eber states 1ithin the 62 have to reach a consenus on econoic .olic+ as 1hole(

i&e& the easures ,or targeting the in,lation( une.lo+ent( easures ,or ,avoring

[email protected]( etc& -he eber states have to share coon interest over trade%o,,s in order

to central bank .ursue one coon econoic .olic+& I, the eber states do not share

siilar .re,erences( each od the 1ill 1ant !uro.ean 6entral Bank to .ursue their individual

interests( 1hich 1ill onl+ create a chaos& verall( it/s not i.ossible to iagine *K in this

scenario to be .art o, a coon onetar+ .olic+( but having in ind the crisis toda+ and all

obstacles to aintain coon onetar+ .olic+ it/s hard to iagine that it could be in the near

,uture&

Solidarit+ criterion: When the coon onetar+ .olic+ gives rise to con,licts o, national

interests( the countries that ,or a currenc+ area need to acce.t the costs in the nae o, a

coon destin+&

-he con,lict o, solidarit+ and nationalis is an entirel+ .olitical consideration as

1hen the coon onetar+ .olic+ gives rise to con,licts o, national interests( the

countriesN need to acce.t the costs in the nae o, a coon destin+/#)& 2s long as the

di,,erences o, o.inion that ste ,ro the doestic .olitical .rocess are not too great( an 62

should be able to survive di,,erences o, o.inion along national lines& -his criterion is .erha.s

the hardest to easure( as there is no sure 1a+ o, easuring ho1 ,ar citiens o, one nation are

.re.ared to the interests o, another over their o1n in the nae o, coon interest& 9igure $

o,,ers one ans1er to this .roble( and indicates that the level o, su..ort ,or .olitical union

ranges ,ro )$O in the *K to ?O in Slovakia( 1ith the average being 5FO& While the !* is

a uni3ue organisation in that the eber states o,,er u. ore co.onents o, sovereignt+ than

an+1here else in the 1orld& While su..ort ,or this is ,ar ,ro total( the ,act that it exists and

,unctions 1ith .ur.ose indicates that although national sentient is .resent( ebers see to

be .re.ared to act ,or the good o, all&

6onvergence 9lexibilit+ Investent9inancial

services

ro1th(

e.lo+ent

and stabilit+

Wage and .rice

,lexibilit+

9actor obilit+

9inancial

integration

.enness


12/14

Groduction

structures

In,lation

9iscal integration

Micro%e,,icienc+

bene,itsShocks

-ransission

6+cles

Real exchange rate

2djusent over

tie

6a.ital arkets

M -reasur+ "00);(E-he ,ive test ,rae1ork: !M* stud+E( .&5$

% ,ul,illed criteria

Concluding remar"s

!.irical evidence sho1s that *K( although its currenc+ is a..arentl+ ,loating ,reel+ and

dis.la+s signi,icant instabilit+ in its relations 1ith onetar+ units o, its ain !uro.ean

.artners eran+ and 9rance( and then .resentl+ 1ith the !uro one;( do not dis.la+( as

ex.ected b+ 62 theor+( as+etries in acro%structural shocks i&e& strong negative

correlations;& -his disconnection o, the t1o easures suggests that ,loating o, the Gound and

high instabilit+ o, its relations 1ith the currenc+ unit o, its !uro.ean .artners is not justi,ied

b+ acro%structural characteristics& 9ro an 62 a..roach .oint o, vie1( there are no

e.irical evidences ,avoring the o.tion o, kee.ing *K out o, the !uro one( 1hile ever

closer econoic links and gro1ing instabilit+ at the 1orld level are strong arguents in ,avor

o, the joining& S+etricall+( a..arent siilarit+ in the evolution o, *K and *S e,,ective

exchange rates is not ex.lained b+ signi,icant s+etr+ o, acro%structural shocks o, the

t1o countries& -here is no strong arguent in ,avor o, exchange rate .olicies targeted

to1ards .riorit+ to stabiliation 1ith *S


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*S< still .la+s the doinant role& Pet closer ,inancial integration 1ith the !uro one could

enter in contradiction 1ith this o.tion o, reaining disconnected 1ith the !uro one in ters

o, exchange rate& , course this atter can onl+ be settled .oliticall+ and issues such as

debates over sovereignt+ can inter,ere 1ith the logic o, evaluation o, costs and bene,its o, the

t1o o.tions&

9inall+( one can 3uestion 1hether joining the euro one reall+ does bring about .ros.erit+ and

gro1th& ne can take -he Re.ublic o, Ireland as an exa.le& Ireland becae a eber o, the

!uro.ean *nion in #A) and ado.ted the euro in "00"& o1ever( in #AAA( the decision to ado.t the euro 1as ade& -his eant that Ireland 1as

,orced to ado.t the !*/s interest rate( 1hich led to devastating e,,ects& Interest rates 1ere

halved& -his led to in,lation( and in "00"( in,lation rose to $&O& -oda+( Ireland has an

in,lation rate o, % #&?O& 9urtherore( une.lo+ent no1 lies at #)&O& Ireland can be used

an exa.le to sho1 that Britain/s conditions do not atch those o, the euro one& It is better

to sta+ out and avoid an econoic crash rather than risking ever+thing ,or a single currenc+

1hich Britain essentiall+ doesn/t reall+ need& Britain is doing just ,ine as it is& Wh+ risk

shaking u. the econo+ unnecessaril+D , course( ado.ting the euro doesn/t necessaril+

ean that the British econo+ 1ill crash&

-he cost%bene,it anal+sis leads to the vie1 that various costs and bene,it ites look ver+

di,,erent ,or the *K& -he 1eights one attaches to these di,,erent costs and bene,its are likel+

to have an i.ortant in,luence one on one/s conclusion as to 1hether the *K 1ill or not

bene,it ,ro becoing a eber o, the !M*&"A

"A


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Re,erences:

#& eavenD 2n

.tiu 6urrenc+ 2rea Index ,or !uro.ean 6ountriesE( !uro.ean !conoic Revie1

$#: ?#%0&?&

Economics of the EU Ivana Kovacevic

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