British Reluctance to Join Euro Zone Examined

British Reluctance to Join Euro Zone Examined

This work will discuss the reluctance of the British to join the EU and will relate the historical phase of the project with an extensive focus on the theoretical aspect. This issue will be addressed from the intergovernmental and liberal intergovernmental perspectives. From a political standpoint the United Kingdom has historically shown reluctance in terms of entering into an EU identity and added to this the benefits of EU membership have increasingly become only marginal benefits. There was a lack of involvement on the part of the British in the historical development of the European Union. It is stated in the work of Alistair Jones that while there was a “lack of participation in the European Coal Community (EEC)…[this]…”did not mean that Britain failed to influence their development.” The European Defense Community was participated in by the British and “British willingness to participate highlighted a degree of commitment towards Europe that has gone unreported.” (Jones, 2007) However, Jones states that even after Britain had joined the European Economic Community the label ‘reluctant European’ did not go away.” (2007) Jones (2007) states that Europeans “…are not enthusiastic about British membership, and many Britons appear unenthusiastic about EU membership…” And yet Jones states that it is interest to note “…the extent to which each has had a positive impact upon the other. Britain’s role in trying to modernize the European Union…the EU has had a huge impact” however it is hardly ever reported as such upon the British. However, it must be noted as well that there have been both positive and negative impacts of the EU upon Britain.

I. BRITISH HESITATION in IMPLEMENTING the EMU and EURO

In a recent work of Pettinger (2007) entitled: “Why the UK Will Never Join the EURO” states specific advantages and disadvantages for the United Kingdom in joining the EU, which include the following advantages: (1) Exchange Rate Stability; (2) Inward Investment; and (3) Low Inflation. The primary advantage to joining the EU is the reduction of exchange rate volatility in and among the United Kingdom’s trading partners. It is stated by Pettinger that “since 2003 the £ has displayed very little exchange rate volatility. Therefore, at the moment there is little risk associated with exchange rate fluctuations.” (2007) Secondly, Pettinger states that inward investment continues to “soar even outside the EURO” and while it was believed that, it would be a necessity to join the EURO in attraction of enough inward investment in the UK it is now apparent that “a separate current has not been a deterrent to further inward investment.” (Pettinger, 2007) Third stated by Pettinger is that low inflation which caused the UK to be labeled the “sick man of Europe” due to “boom and bust cycles and high inflation” has abated since independence was granted to the MPC in 1997 and has “remained close to the government’s target of 2%.” (2007) According to Pettinger: “Joining the Euro would give the UK a small gain in terms of lower transaction costs and greater exchange rate stability. However it must be emphasized for many businesses, both domestic and foreign, these costs are a small percentage of total costs. However many economists fear that joining the Euro could lead to some significant economic problems.” (2007)

II. ADVANTAGES and DISADVANTAGES of JOINING the EU

The disadvantages of Joining the EU according to Pettinger include those as follows: (1) Loss of Independent Monetary Policy; (2) Difficulty in getting out of a recession; (3) Sensitivity to interest Rates; and (4) Loss of independence of Fiscal Policy. (2007) in terms of the independent monetary policy of the UK, upon “joining the EURO interest rates would no longer be set by the MPC” instead the European Central Bank would set rates and will view the entire EURO economy rather than what is the best thing for the United Kingdom. In relation to a recession, should the UK suffer a recession interest rates could not be cut. The housing market in the UK is quite sensitive to interest rates changes. Pettinger states: “Unlike European countries most UK householders own their own house, their variable mortgage is a high % of their income. Thus, even a 0.25% change in interest rate can significantly affect disposable income. If the UK were to join now and interest rates were to fall by 2% it would very likely cause a further boom in the housing market which would feed through into higher inflation.” (2007) Pettinger further cites that “growth and stability pact limits the levels of government borrowing to 3% of GDP. This is another difficulty in getting the economy out of a recession.” (2007) Since the economy in the UK is doing quite well and historically speaking economic performance in the UK is “quite remarkable. Thus, there seems to be little incentive for a British politician to take on the entrenched Euro skepticism prevalent in British media and society. There is little to be gained by joining and there are many potential problems, the Queen’s head is safe for the foreseeable future.” (Pettinger, 2007)the work of David Hayworth entitled: “Explaining British Policy on the Euro” states that British entry “in the Third Stage of EMU and adoption of the euro to replace the pound has been one of the most divisive issues in British politics since the debates on the ratification of the Maastricht Treaty. The start of Stage Three, the worrying slide of the exchange rate of the euro and the debates on the application of the Stability Pact rules exacerbated the intensity of the debate.” (2004)

III. DECISION-MAKING on EU INTEGRATION POLICIES: ‘A NESTED GAME’

The work of Weighaupt entitled: “Reluctant Europeans and the Economic and Monetary Union: Party Positions and Strategies in Denmark, Sweden, and the United Kingdom” states that decision-making “on European integration policies have become more and more a ‘nested-game’ for governments of the European Union (EU) Member States. Political party members of governing parties in general and Chiefs of Government (COGs) in particular are actors participating in two different games at the same time. Individual and collective strategic decisions and outcomes in one game (the domestic political arena) are inherently linked to individual and collective strategic decisions and outcomes in another game (the political arena on the European level).” (Weishaupt, 2004) the outcome is the appearance of a strategy might be “suboptimal in one game…may in fact be optimal if political outcomes in the other game are also taken into account when deciding what actions to take.” (Weishaupt, 2004) Weishaupt relates that the primary political and decision-making body in the EU is “the Council of the European Union, in which national ministers represent their home country’s interests.” (2004) Affecting the country’s “positioning on the issue of European integration in general and EMU in particular are “a party’s ideology and its size.” (Weishaupt, 2004) Three ways that this position is affected include: (1) Ideologically extreme parties hardly ever participate in governmental coalitions; (2) party size matters as their relative weight determines which and how many ministers a party will get once elected into government; and (3) large governmental parties are most influential as they deliver the prime minister, who in turn will represent his or her country in the European Council.” (Weishaupt, 2004) the ideology of a party “comes into play if the European policies contradict or hinder domestic goals. In the case of EMU, a party’s ideology can be problematic in two cases” states Weishaupt which includes: (1) left of center parties might disagree with the Europeans Central Bank’s principal goal of price stability rather than full employment; and (2) national-conservative, right of center parties might oppose the European monetary project as it undermines a too sensitive sector of national sovereignty.” (2004) the result is that ‘the parties that need to balance their ideological goals with European goals runs the risk of either questioning the common European project and thus undermining their bargaining position, or alienating parts of their electoral base and thus losing votes as a consequence.” (Weishaupt, 2004)

IV. THEORETICAL DISCUSSION of BRITISH HESITATION in EU MEMBERSHIP

The work of Thomas Risse entitled: “To Euro or Not to Euro?: The EMU and Identity Politics in the European Union” states that the nearing of the EU’s decision in 1998 as to which countries would be those to join with the Economic and Monetary Union (EMU) beginning in January 1999, “the more heated the debates became” surrounding the merits of the ‘euro’ on the political and economical level. It was reported by Risse that at this time that of the “big three (Britain, Germany and France)” that France was the only one supporting the ‘euro’. Risse argues that “explanations based on solely material conceptions of actors’ interests- whether economic or geopolitical – are indeterminate with regard to explaining the variation in attitudes.” (1998) He states that this is because it is necessary to link “these arguments…to broader visions about European political order to explain the differences in attitudes and interests.” (Risse, 1998) First, the “Euro is about European union rather than just lowering transaction costs” and secondly “intuitionalists arguments about path dependent processes offer significant insights if they are linked to the more constructivist reasoning” which Risse develops in his work. (1998) Third stated is the primary argument is that “the visions about European order which give political meaning to EMU, need to be understood in the framework of identity politics.” (Risse, 1998) Risse states that the controversial nature of relationships of political elites in the ‘big three’ as well as the various attitudes “can be explained by differences in the construction of national collective identities and their relationship to European order.” (Risse, 1998) Risse note that historically, money “…has been closely linked to state- and nation-building.” (1998) There is no exception when it comes to the Euro and while the Euro has been “incorporated into their (Germany and France) nationally defined collective identities, British policy makers including New Labor remain hesitant.” (Risse, 1998) Risse explores this issue by first asking the question of “How it is to e explained that the Euro has survived all challenges since the Maastricht treaties were signed in 1991, including a near rejection by the French public in the 1992 referendum which would certainly have killed the treaties which includes: (1) the near collapse of the EMS in 1992/93; (2) the difficulties which most EU member sates face in implementation of the Maastricht convergence criteria requiring stiff austerity policies at times of sluggish economic growth and unprecedented levels of unemployment; (3) high levels of opposition to the Euro in mass public opinion of the most important member states; and (4) the continuing grumbling among the German and French political elites.(Risse, 1998)

V. NEOFUNCTIONALISM and LIBERAL INTERGOVERNMENTALISM

According to Risse, the “first-cut answer to the puzzle” leads to an examination of economic interests of integration and traditional European theories such as, “neofunctionalism or liberal intergovermentalism sees as the driving forces behind European integration.” (Risse, 1998) in this view, a single form of currency is the only “logical” progression to a single market in Europe, which would enable “free movement of goods, capital, labor and services.” (Risse, 1998) the excessive fluctuations of currency would be rendered null by the Euro and the same would result of the “protectionist pressures” known to put a single market in jeopardy. Additionally transactions costs would be eliminated and might result in investment increases. The hope is that the Euro will result in “increased economic interdependence among the EU member states and to the challenges of globalization.” (Risse, 1998) However, upon closer examination one finds that the arguments supporting the Euro from the economics perspective “are not clear.” (Risse, 1998) Those who advocate neoliberal economics cannot come to an agreement among themselves “on the merits of a currency union in the absence of a political union or a common economic policy. Some argue that the European Central Bank will not be truly independent from political influence…” (Risse, 1998) and others hold that there will be no effective resistance to pressures of inflation “if there is no integrated economic policy and a political union.” (1998) Risse states: “considerable disagreement” exists “among economists on what constitutes and ‘optimal currency area’ and how much economic homogeneity has to be achieved for it.” (Risse, 1998) Economic preferences among the individual countries “alone do not appear to explain the variation in attitudes toward the Euro…” (Risse, 1998) in the case of Britain, Risse states:,,” one could argue that the decision not to join EMU in 1999 which was re-affirmed by the newly elected Labor government, reflects sound economic policies, since Great Britain’s economic cycle is out of sync with continental Europe.” (1998)

VI. NEOLIBERAL ECONOMIC ORIENTATION of BRITISH GOVERNMENT

It is interesting that of all the countries that would have difficulty in meting the Maastricht convergence requirements, the Britain in “one of the few countries which would have no trouble meeting” the criteria and this is especially true in relation to the “budget deficit goal of not more than 3% of GDP.” (Risse, 1998) the EMU is also a nice fit with the “neoliberal economic orientation of the British government which did not change much under Tony Blair, at least as compared to the continental European states.” (Risse, 1998) Britain has been eyeing foreign direct investment for quite a few years. The Euro would appear attractive for non-European multinational corporations entering a single market due to the lowering of the costs of transactions and the elimination of the instabilities associated with exchange rates.” (Risse, 1998) at the time of the report of Risse (1998) he states that business elites in Britain were lobbying the Labor government in hopes of an early entry into the Euro zone.

VII. GEOPOLITICAL REASONS for BRITISH HESITATION on EMU & EURO

Risse examines the geopolitical reasons in search of the answer to the puzzle he poses in his work and states that the realistic view would argue that “European integration has always been as much about security concerns as about solving economic problems.” (1998) Risse asks is the same reasoning to also be applied to the EMU as well? Following the Cold War having ended the problem of Germany returned to the agenda of European concerns and it can be held that the Maastricht treaties and EMU “be regarded as an effort to contain German power in Europe in the aftermath of unification by firmly binding the Federal Republic to Western institutions and by preventing a German ‘Sonderweg’. Moreover, the single currency and the European Central Bank (ECB) effectively end the quasi-hegemony of the German ‘Bundesbank’ over monetary policies in Europe.” (Risse, 1998) the arguments as such in favor of EMU Europe-wide have been made worldwide and this is especially true in the country of France whose political elites “have been obsessed with the German problems since the end of World War II.” (Risse, 1998) the attitudes of the French toward integration into the EU is explained “to some degree…[by this]…obsession.” (Risse, 1998) Risse questions why it is that the EMU is viewed as the only viable “instrument of ‘binding’ among those who also believe “in the effectiveness of international institutions.” (Risse, 1998) Also, if the EMU is truly representative of a strategy of “binding the lesser European states to contain German power, why has Germany agreed to it and why is it that the German government under Chancellor Kohl remains an enthusiastic supporter of a single currency.” (Risse, 1998) While the argument is posited by some that the EMU was the cost the Bonn government was assessed in its “acquiescence in German unification by his European partners, above all France,” in actuality and factually “this argument…is wrong.” (Risse, 1998) Long before unification it was known that West Germany supported a single currency on the condition that “economic convergence would take place prior to its introduction and that a European Central Banks would be as independent as the Bundesbank.” (Risse, 1998) Germany conceded only two things to EU and France “as quid-pro-quo for EU support for unification” which related to the treaty on political union and acceleration of the timetable for the EMU to be ratified. The EMU is stated by Risse to “appear to be firmly locked in” but yet a “powerful explanation for the puzzle” of this is required.

VIII. EXAMINATION of CLAIMS of PATH DEPENDENCY in BRITAIN

Risse states that the arguments posited by “historical intuitionalists on ‘path dependence'” is one which “positive feedback loops leads to increasing returns. An institutional decision in a certain direction made at a ‘critical juncture’ offering several possible choices subsequently changes the parameters in such a way that the next decision is likely to move in the same direction.” (1998) the path-dependent process is stated by Risse to be ‘in which positive feedback loop lead to increasing returns.” (1998) a decision by an institution made “at a critical juncture” and “in a certain direction” and that offers various choices thus results in the parameters being changed in a manner that generally results in decisions that follow likely to follow the “same direction.” (Risse, 1998) Path dependent processes therefore “continue irrespective of the rationality of the initial decision and explain why actors often ‘stick to their guns’ even though their instrumental interests might have changed.” (Risse, 1998) Therefore, it is the first decision setting a course that is made at a critical time that leads the following decisions in the same direction resulting in ‘path dependency’ in the institutional decision processes. The costs associated with adoption of policies that were available in the beginning increase over time and as well the options for exiting are reduced once the path has been chosen within the framework of this theory of institutional decision-making. Risse states it as being that once having been established the Maastricht treaties “set in motion a process which makes the implementation of EMU more likely over time, since the costs of changing course are increasingly prohibitive. The political costs would involve re-negotiation of the Maastricht treaties, while the economic costs of changing course relate both to the enormous investments o f public institutions in implementing the treaty provisions and of the private sector (banks and industry) in setting up new infra-structures.” (Risse, 1998)

Risse stats that an argument that is much more convincing in explaining the puzzle is that given by the institutionalist view however this view does not provide a clear focus on economic or geopolitical interests but it does “complement…rather than substitutes the explanation” stated by Risse. Risse states that the path dependency explanation only makes sense if the focus is on the national level in that both Germany and France have been complicit with the EMU throughout the process while Great Britain “at the critical juncture of the treaty negotiations – opted for an alternative path and continues to do so.” (Risse, 1998) the financial markets reaction is a “case of adaptive expectations with economics following politics, not the other way round. The issue is certainty and stability, not the nature of a particular decision.” (Risse, 1998) it is felt by the decision makers both those who are national and supranational that “they should stick to EMU and the timetable outlined in the Maastricht treaties come what may…” (Risse, 1998) These decision-makers have in turn communicated to the financial markets the same because at stake was the credibility of their commitments instead of the “substantive context” of those commitments…and in the words of Risse: “In other words, we are back to politics.” (Risse, 1998) the arguments of historical institutionalists concerning path dependence place great emphasis on the effects of learning which “involves the gradual adaptation and internalization of new norms and rules, i.e. A socialization process.” (Risse, 1998) EMU being implemented is a reinforcer of these norms and makes certain that these norms are made part of “collective beliefs of actors, and modifies the standard operating procedures of existing public and private institutions.” (Risse, 1998) the result being that these newly incorporated norms are “taken for granted” and since norms are “closely related to collective identities” they are generally held to be principles of behavior that is appropriate and thereby “enacting given identities.” (Risse, 1998) Because a common currency and the processes of state- or nation-building are linked in history then Risse holds that the enactment of norms should be all the more relevant in terms of the Euro. Finally, if it is true that the formation of identity and norms are internalized and institutionalized “the question still remains where are new norms and rules such as implied by the introduction of a single European currency come from and how they relate to given collective identities?” (Risse, 1998) the crisis of EMS illustrates that arguments can be stated against the sole focus on path dependency. For instance Britain’s Prime Minister John Major viewed the crisis as “ultimate proof the EMU was a risky proposition” while Chancellor Kohl and President Mitterrand came to the conclusion that the crisis ‘made a single currency even more imperative in order to avoid future crises.” (Risse, 1998)

IX. COLLECTIVE IDENTITY and SOCIAL IDENTITY INFLUENCING FACTORS

The process of preference formation among the ‘big three’ political elites requires examination in the view of Risse to attempt to resolve these opposing views. Toward this end Risse tackles defining the ‘collective identity’ and states that this is a social identity, which provides “a system of orientation for self reference, crating and defining the individual’s place in society.” (Risse, 1998) This results when a group of individuals hold the belief that they have common characteristics and resulting is formation of “an imaged community.” (Risse, 1998) the collective identity results in a degree of depersonalization” which is required in the creation of a social identity. National identities are in truth social identities, which are used in providing definition of a ‘territorial’ social group in which constructed are “imagined communities of nation states…closely linked to ideas about sovereignty and statehood.” (1998) Resulting is that “visions of just political and social orders” are contained within national identities.” (Risse, 1998) Not only do identity crises result when actors are empowered or constrained by political institution seeking to change constructions of identity through distribution of ideational and material resources because there is not an equal chance for all political actors in making a challenge of the national identities which prevail.” (Risse, 1998; paraphrased) the attitude of the British toward the Euro did not change over the ten years 1989-1999 and yet the right was reserved by the British government to ‘opt-out’. The views of the British on integration with EMU “range from those opposing further Europeanization” which is the right Conservative wing and Labor’s far left and far right, “to a mainstream group within both main parties” which do support a ‘Europe of the nations’ with the minority in the political discourse continuing to be the European federalists (among Tories and within Labor). Risse states that “even the Euro-skeptics who have recently taken over the Conservative leadership, remain divided among themselves in both major parties…” As it is the wish of some that the country would pull out of the EU totally and other merely desire an area of free trade. Risse states the fact: “the mainstream of the two leading parties share a consensual vision of European order.” The Labor government stated arguments in the 1997 elections that “…nour vision of Europe is of an alliance of independent nations choosing to cooperation to achieve the goals they cannot achieve alone.” (Risse, 1998) the Labor was clear in its opposition of a European federal superstate. The claim in the manifesto of Conservatives was somewhat similar in that a positive vision was held by the government for the EU as “a partnership of nations. We want to be in Europe but not run by Europe.” (Risse, 1998) Both Labor and Conservatives hold a ‘wait and see’ position on the single currency policy. The conclusions of Risse and others state a belief that it is the view held by British political elite even still of preferring to be a ‘part of’ Europe and to ‘remain in” Europe yet clearly having no desire to be ‘run by’ Europe that stalls the single currency implementation in Britain. The EMU and the Euro cannot be understood to be economical in nature but instead is political in nature. The benefits of adoption of the Euro and the disadvantages of the same are stated by Risse to be “indeterminate” however, very relevant and weighing in the decisiveness of Britain to make no decision rest upon the fact that the English identity of the British “still constructs ‘Europe’ as the ‘other’ signifying the continent” while simultaneously holds view of national sovereignty which are difficult to reconcile with the EMU institutional framework. Therefore, ‘wait and see’ may be understood as possible and potential future support at an indeterminate time and date.

SUMMARY & CONCLUSION

While many unanswered questions remain and while many theoretical views are held of the hesitation of Britain in relation to implementation of the EMU and the Euro, it is clear that this issue is not one of economics but one of national identities and geopolitical issues and it is just as clear that Britain holds that its national identity is different and apart and separate from that of the European Union identity.

Bibliography

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Jones, Alistair (2007) Britain and the European Union. Edinburgh University Press. Online available at http://books.google.com/books?id=TPIVYIO4NsoC&pg=PA175&lpg=PA175&dq=british+reluctance+to+join+the+eu&source=web&ots=LSnWPXcjXM&sig=nEaqcfIyPijSiJofXJ8Y02DQEck&hl=en#PPT1,M1

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