StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

The UK, the Euro and EU Enlargement - Essay Example

Cite this document
Summary
The paper "The UK, the Euro and EU Enlargement" discusses that generally, it can be assumed with a high degree of certainty that if Britain is to have a future in the European Union, it will one day have to abandon the dear old pound for the shiny new Euro. …
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER91.4% of users find it useful
The UK, the Euro and EU Enlargement
Read Text Preview

Extract of sample "The UK, the Euro and EU Enlargement"

The UK, The Euro and EU Enlargement Did the UK opt-out from the Euro and EU enlargement make Britain less attractive for foreign investors? Over the years, the European Union (EU) has evolved from a series of treaties and predecessor relationships between European continental states to a more perfect union between various states. The EU acts more or less as a federation (on monetary affairs, agricultural, trade, environmental, economic and social policy) or a confederation (on home affairs) and as an international organization (on foreign affairs). It has developed into a common single market of 25 member states which will expand to 27 members by 1 January, 2007. The primary bodies consist of a customs union, a common agricultural policy, a common trade policy and a common fisheries policy. Most importantly, the single currency i.e. the Euro is managed by the European Central Bank and is so far adopted by 12 of the 25 member states (Wikipedia, 2006). Initially, the primary purpose of liaison between the European countries was to avoid catastrophes such as the world wars which started in Europe and engulfed the world with time. However, the economic benefits also have to be considered because the European Economic Council and then the European Union have emerged as the world’s single largest developed market with a total population that is over 450 million. It also has the highest GDP i.e. more than six trillion British pounds (Wikipedia, 2006). The EU is certainly not resting on its laurels and is in the process of expanding its member base (27 countries by 2007). This expansion process makes the group more attractive to foreign investors since membership of the group signifies common laws, the advantages of uniform policies in a single market, the relatively free movement of goods and services, unhindered movement of skilled labour with similar employment and social policy between countries. For the financial and industrial sectors, the EU brings free movement of capital, uniform industrial and intellectual property rights, a liberalized energy market and uniform consumer protection policies. As a final step towards the union, European countries are adopting the single currency, Euro. There are numerous benefits of joining the Eurozone as discussed by Huhne (2004), adopting the single currency provides a better deal for consumers owing to competition and would also help in pension income, especially when the risk would be spread around the wider euro maket. UK will be able to focus on real monetary and economic environment instead of using interest rates to maintain over valuation of Pound Sterling. Alignment of interest rates will also lead to lower interest rates for borrowers – corporate or consumer. Since Britain will not be exposed to over valued currency, higher interest rates and competition, investment will increase resulting in increased jobs. Businesses will save on currency conversion costs. London is already a major financial centre of Europe and with joining the Euro has the potential of turning into “New York of Europe” considering the expertise already being provided to EU businesses. However, considering all of the advantages of Eurozone, UK has still not made a decision to either join or maintain pound. In case UK becomes a member of EMU, businesses will invest more because they will face fewer risks from volatile exchange rates. Currently companies are of the view point that Britain will join, which is maintaining the FDI. But criticisms have started to emerge and reactions are being noticed. If the take automobile industry as an example, Toyota and Nissan, major manufacturers with facilities in UK threatened to pull out of UK since the UK was not willing to join the Eurozone. What the big car companies are complaining about is the level of exchange rate since the pound has moved the wrong way for them against the euro. Toyota and Nissan both have plants on the continent so it would be easier for them to switch production especially due to the unfavourable exchange rate. Honda, even though has increased its production capacities, would prefer Britain to be in the single currency. Honda has elaborated that the decision was based on exchange rate between pound and yen moving in favour of British production just as pound to euro exchange rate has moved against British production. In case of further appreciation of pound, Honda might have to change their decision. Foreign currency exchange rate play a major part for Trans National Corporations’ (TNC) investment decisions. A study conducted by Barrell et. al. (2004) regarding relationship between foreign direct investment and exchange rate concluded that: “We find that exchange rate uncertainty in the Euro Area and in the UK has a strong negative effect on FDI. There is strong evidence that the correlation between the sterling dollar exchange rate and the euro dollar exchange rate influences location decisions of US firms in Europe. In particular, we found evidence that, as exchange rates become perfectly correlated, US firms tend to divert their investment from the Euro Area to the UK (Barrell et. al., 2004, pg.21).” Exposure to foreign currency fluctuations directly affects the profitability of TNCs. Stronger pound influences investment decisions. Large investment projects have long incubation periods and over valuation of pound has already effected the FDI in UK. In 1997-98 Britain attracted 52% of of FDI in EU which fell to 24% by 1999-2001 (Kenen, 2003). TNCs are positioning themselves to serve a large market of EU which brings the benefit of single currency, along with free movement of goods and services and human resources. The investment in shape of BMR and Greenfield projects is decreasing and TNCs are looking towards other EU member countries for their investment decisions. Peugeot plant and Ryton, UK closed because of this reason – even the British Government grant of fourteen million pounds for replacement was rejected by Peugeot. The reasons were simple as the plant was 40 years old and not flexibly constructed for balancing modernization and replacement. Even the grant couldn’t make the project competitive compared to new plant in Slovakia. The Japanese plants in UK have all been built using flexible techniques, which ensure longevity, and this has been confirmed by the introduction of new products lines in all of them. Even then the Japanese giants are evaluating moving their production facilities to other EU countries (Morely, 2006). The decision to not join the EMU will lead to decrease in Greenfield investment and may move toward merger and/or acquisitions considering that most of the payment is made in form of shares of the acquiring company and is comparatively easier to shift the focus. Honda is expanding the production facility in UK in comparison to pound/yen exchange rate parity makes it profitable. Toyota and Nissan’s vertical supply chain has already moved to other EU countries. As Mr Hiroshi Nemichi, chairman of Mitsubishi Corporation (UK) plc, as quoted by Huhne, says: ‘If Britain were to rule out membership of the single currency, as the anti-Europeans seem to want, Britain would be less attractive to inward investors.’ Regions like South Wales and the North West would be particularly badly hit if foreign investors went to the euro-zone rather than Britain, yet this is almost inevitable if we rule out euro entry. Given that up to 80 per cent of the output of many Japanese and US plants in Britain is aimed at the euro-zone market, why should they take the extra risk of the sterling exchange rate wiping out their profits? From a TNCs point of view, the EU provides low or no barrier’s to trade, easier access to factors of production, easier access to huge market. The single currency mitigates risks of foreign currency exchange rate fluctuations and also makes it easier to borrow funds and take investment decisions along with pricing of inputs and products. While Britain offers some of these advantages by being a member of the EU, not being a part of the Eurozone certainly causes some hesitancy for investors even if the pound is a relatively stable currency compared to many others in the world. It can be assumed with a high degree of certainty that if Britain is to have a future in the European Union, it will one day have to abandon the dear old pound for the shiny new Euro. However, this transition must be made carefully and the economic requirements for the transition must be there before any decision is made in this regard. At the same time, the political, social and technological implications of joining the EU must also be kept in mind since the pound itself is a very important international currency. The advantages of having more foreign direct investment coming to the UK can not be over stated since the Euro would certainly go a long way in helping that cause. However, Britain must also appreciate that there is a certain amount of risk in giving up control of the domestic currency and permanently linking the economy of the UK to those of the other members in the European Union which may not be as attractive to foreign investors. Works Cited Morley, K., 2006 , ‘Britain’s Car Industry Faces Uncertain Future’, British Broadcasting Company, [Online] Available at: http://news.bbc.co.uk/2/hi/business/4925436.stm Barrell, R. et. al., 2004, ‘Foreign Direct Investment and Exchange Rate Uncertainty in Imperfectly Competitve Industries’ Imperial College London [Online] Available at: http://www.niesr.ac.uk/pubs/dps/dp220.pdf Kenen, P. B. 2003, ‘Making the case for the euro: no economy is an island, entirely of itself or why Britain should join the EMU’. The international Economy [Online] Available at: http://www.findarticles.com/p/articles/mi_m2633/is_1_17/ai_97118169/pg_1 Huhne, C., 2004, ‘ 12 Reasons for joining the Euro’ Liberal Democrat European Group, [Online] Available at:: http://www.ldeg.org/articles/3.html?PHPSESSID=94196f22e8116b0b44eef91262fbd6c5 Thornton, P., 2005 ‘Foreign investment in Britain rises four-fold’. Independent, [Online] Available at: http://www.findarticles.com/p/articles/mi_qn4158/is_20050930/ai_n15650355 Wikipedia. 2006, ‘European Union’ [Online] Available at: http://en.wikipedia.org/wiki/EU Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Do the UK opt-out from the Euro and EU enlargement make Britain less Essay”, n.d.)
Do the UK opt-out from the Euro and EU enlargement make Britain less Essay. Retrieved from https://studentshare.org/miscellaneous/1538365-do-the-uk-opt-out-from-the-euro-and-eu-enlargement-make-britain-less-attractive-for-foreign-investors
(Do the UK Opt-Out from the Euro and EU Enlargement Make Britain Less Essay)
Do the UK Opt-Out from the Euro and EU Enlargement Make Britain Less Essay. https://studentshare.org/miscellaneous/1538365-do-the-uk-opt-out-from-the-euro-and-eu-enlargement-make-britain-less-attractive-for-foreign-investors.
“Do the UK Opt-Out from the Euro and EU Enlargement Make Britain Less Essay”, n.d. https://studentshare.org/miscellaneous/1538365-do-the-uk-opt-out-from-the-euro-and-eu-enlargement-make-britain-less-attractive-for-foreign-investors.
  • Cited: 0 times

CHECK THESE SAMPLES OF The UK, the Euro and EU Enlargement

EU Enlargement to Eastern Europe

This paper ''eu enlargement to Eastern Europe'' tells that When the European Union enlarged its membership southward to cover such countries as Greece, Portugal, and Spain in the 1980s it altered the EU's economic geography and budgetary structure some, but the process was smooth and painless overall.... Following the launch of the euro as the EU's common currency, the EU found it necessary to shift its attention to the East.... U enlargement to Eastern Europe will boost the European common market from 320 million people to about 470 million....
8 Pages (2000 words) Essay

Forthcoming Enlargement of European Union

Historically, each stage of eu enlargement used to cause the 'displacement of powers' on the continent.... n this project, I will evaluate the eu enlargement-associated effects on the existing member states located in the Mediterranean basin, i.... I will providence all-round analysis of the effects of eu enlargement on existing member-states which includes political, socio-economic, and other angles.... eneral effects on eu enlargement on current Mediterranean member-states ...
10 Pages (2500 words) Essay

Hedging an Account Payable

percent while the uk rate of interest (RUK ) for 180 days is also 5.... n this type, there should not only be a need for our US based company to acquire Pounds but also the uk supplier needing US dollars.... This may be recommendable considering that the uk supplier has a subsidiary in the US which may need US dollars for its transactions.... n this type, there should not only be a need for our US based company to acquire Pounds but also the uk supplier needing US dollars....
4 Pages (1000 words) Case Study

Why the Enlargement of EU is Beneficial for the Economy of the Member States and EU as a whole

It sets out the economic arguments for the enlargement of the European Union.... It recommends the European commission to support the enlargement of the EU in favour of better health of the economy of each member state and the EU as a whole.... According to the report the background to enlargement is explained in the first section.... But these countries will have to face increasing opposition to enlargement of EU from some member states....
15 Pages (3750 words) Essay

The UK Department of Trade and Industry

It will also delve, to a limited degree, in the effects of eu enlargement in the UK's FDI.... The paper 'The UK Department of Trade and Industry' presents the euro which had its roots from the market integration of the European Union.... The result of the EU monetary union was the euro.... Monaco, San Marino while the Vatican City is licensed to issue and use the euro (UK DTI).... By May of the same year, the company claimed the strength of the Sterling against the euro necessitated the need to cut costs by 30 percent....
6 Pages (1500 words) Term Paper

Should the UK join the Euro currency

The paper "Should the UK join the euro currency" aims to analyse whether the UK should join the euro currency or not.... More specifically, the participation of Britain in the monetary union as it has been formulated and applied in the members of eu has been doubted as of its feasibility.... The appearance of euro in 1999 and its acceptance by 11 countries of European Union (at a primary stage) has been the most significant effort of the Community towards this direction....
39 Pages (9750 words) Essay

A Rise in Nationalist Feeling in the Member States of the EU

The two major political issues for the EU are European integration and enlargement.... enlargement, the accession of new states to the EU, is a highly politicised issue.... The paper "A Rise in Nationalist Feeling in the Member States of the eu" discusses that the eu member states have a vision, but that vision cannot be achieved so long as the member states fear the 'other' Europeans moving freely between their borders as members of the eu....
25 Pages (6250 words) Coursework

The European Single Monetary Union

(Cited in New Frontiers Foundation, 2006)Besides the low intra-EU trade turnout, foreign direct investments pouring into member countries are lower than that of non-member UK countries such as the uk.... Policy instruments which the Member States had previously employed to manage their economies were no longer available to the eu members as per agreement.... percent of the three best performing eu countries.... percent requires a vote by the eu to impose the fine....
8 Pages (2000 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us