The implications of the European monetary union Essay Example for Free

The implications of the European monetary union Essay In this report, I will be addressing the implications of the European monetary union and the problems Zeus will have in developing their market in Europe. The UK and EMU When the UK decided not to join the European monetary union (EMU) in 1999, it affected UK businesses, especially those who trade within the EU. Does it matter whether sterling is in or out? For many UK Businesses, trading within the EU has become more competitive. After the introduction of the Euro, an Italian company for example, competing for a German companies business could cut 3% of costs due to their common currency, making it harder for UK business to compete. Currently UK businesses are paying à ¯Ã‚ ¿Ã‚ ½3bn per year in exchange rates, which hit small firms like Zeus the hardest. Advantages By joining the single currency, British businesses will benefit from a fixed exchange rate allowing businesses to plan and budget for future activities more accurately. Fixed exchange rates will deliver stability and increase confidence that will lead to more investment and jobs. By staying out of the Euro Britain will be at a disadvantage to competitors in the Eurozone who already trade with each other using the same currency. The development of free trade has contributed enormously to the economic prosperity across the EU, with the strong position of the wealthier nations and helping to bring the poorer nations more stability and economic success. The introduction of a single currency removes one of the final barriers to free trade i.e. the transaction costs and the uncertainty involved in currency conversion. The removal of national currencies will encourage cross-border investment since the traditional reluctance of many investors to move their money into a currency other than their own will no longer be a factor. Businesses across the Eurozone will therefore be able to attract more investors from other Eurozone countries, and investment will be based on the competitiveness of a business rather than its nationality. This will increase the pressure on uncompetitive businesses to improve their efficiency. An increase in cross-border mergers and acquisitions will also lead to more streamlined and efficient businesses across the Eurozone. Disadvantages Most of Britain international trade is carried out in US dollars, a currency against which the pound has enjoyed far more stability than has the Euro. The fact that the pound has risen so much against the Euro since the Euros launch is a sign of the Euros weakness. Changeover to the Euro would be endured by all businesses in the UK, whether or not they trade with Eurozone countries. Most British companies, sell to local markets. These firms would still incur the costs of conversion and not see any benefit from the removal of currency transaction costs. While there would be a saving from the absence of currency transactions for exporters, these would be offset by the costs of the changeover. There have been fears that inward investment in British based industry would suffer as a result of staying out of the Euro, the reality has been very different. In 2001 the Office of National Statistics reported that inward investment in Britain for the 2000/2001 financial year was à ¯Ã‚ ¿Ã‚ ½341 billion, an increase of 36% over the previous year. The theory that a single currency will lead to the harmonisation and lowering of prices across Europe seems hard to support. Regional differences in prices are a result of differences in levels of taxation as well as variations in labour, property and transportation costs. The cost of living in different parts of the UK varies considerably, even though all regions share the same currency. Less scrupulous retailers would use the introduction of the Euro to round-up prices, just as they did during decimalization 30 years ago. How This Effects Zeus Being part of the EMU will benefit a small company like Zeus, (see advantages above) however, there are some other factors that Zeus need to be aware of. Promotion and packaging will also have to change. The language and content on the wrapping and will have to that of the country it is being sold in. Health and safety requirements of products would have to meet one standard rather then having to adapt products for different countries, however since Zeus currently trade mainly in the USA they would need to adapt their product to EU standards in order to trade within the community, which might be costly but beneficial. Cost of the Benefit If the UK were to join the EMU, cost increases and reductions will occur. Change of Equipment The costs for UK businesses of abolishing the pound and substituting the euro would be massive notes and coins would need to be replaced, along with cash registers, cash dispensing machines, accounting systems etc. The retail sector would have to undergo a complete renovation of cash systems. The costs of this changeover would affect all businesses in the UK, whether or not they trade with Europe and whether or not they will benefit. Consumers and businesses would have to pay for these costs through higher prices and taxes. It would take years before the trivial day-to-day savings on European transactions outweighed the costs of the changeover. More Competitive Markets The Euro ensures companies will face a more integrated European market. Cross-border trade and investment will be stimulated and competition strengthened in many markets. Businesses who see foreign exchange risk and transaction costs as barriers to cross-border trade are likely to move into new markets once these barriers are removed. New business start-ups may also be encouraged. Transparent Price Differences It will be possible to directly compare prices for the same goods and services in different EU countries and spot the best prices. Despite the SEM, price disparities persist as a result of differential pricing policies, tax rates, transportation costs, national market structures, and perceived product values. The ability for consumers to compare prices will move prices towards the lowest market level and businesses will find it hard to maintain pricing policies by country and currency. Treasury and Finance For many European businesses the Euro will present opportunities for long-term savings altering balance sheets, cash flow management, currency management, and corporate finance. Businesses with units operating in different currencies will be able to record and compare all accounting values, margins, costs, expenditures etc. in one currency. Such transparency may greatly assist in processes of internal planning, accounting, and benchmarking. Foreign Exchange Eurozone firms avoid the risk of exchange rate changes. Exchange rate movements dont impose a penalty but volatility in exchange markets and the unpredictability of rates can be costly. Many firms have opted to hedge exchange risks for long-dated transactions or included a margin in their prices to cover exchange rate movements. Under the single-currency, foreign exchange transaction costs are eliminated on internal dealings with benefits as much as 8% on the total price of industrial goods. Wage Transparency Employees will find it easier to calculate and compare wages between workers in different countries within the same company. Transparency of wages will bring salary convergence closer to reality and increase labour mobility. Variations in salary and remuneration exist today and workers always ask why are they paid that much over there when Im paid this much here?, firms can usually demonstrate difference in taxation, benefits, purchasing power etc. by country and currency. Organisations need to consider how to set fair and competitive remuneration packages in a Euro-denominated environment. Lower Borrowing Costs Its axiomatic with a single currency and single central bank that there will be a single interest rate. Banks will lend in Euros and enterprises will be able to borrow from outside their countries without incurring the risk of exchange rates, reducing borrowings costs. Cost savings may be greatest in countries where Euro interest rates fall below previous rates. The introduction of the Euro should favour the development of new financing methods. Overall, firms should have more choice and flexibility in raising finance and, in many cases, will face lower costs. How This Effects Zeus All these costs are going to affect Zeus and it might be a good idea for Zeus to look into these costs now, if they want to stay trading in years to come. Moving Production Many multi-national companies have expressed misgivings of Britain staying out of the Euro and state it could affect investments in British jobs. Companies want to know the value of the goods they sell from the UK will not decrease due to fluctuations in the exchange rate between Britain and the European countries and the cost of British labour will not rise significantly due to a strengthening pound. However, American, Asian and other foreign companies favour the UK as a base for their European operations because of factors such as culture, language, a de-regulated, business friendly environment, and low levels of taxation and corruption. EMU entry could reduce the cost of capital for UK firms if long-term interest rates fell within the EU and if membership of a larger financial market reduced the cost of finance. These costs could fall for SMEs in particular if joining EMU lowers the barriers which prevent SMEs accessing EU financial markets and lowers the cost of bank lending. Over time, EMU is likely to boost cross-border investment flows and foreign direct investment (FDI) in the Eurozone. The UKs share of total EU FDI flows has fallen, coinciding with the start of EMU, and a corresponding increase in the share of the Eurozone. But against the backdrop of many other influences on FDI flows, its difficult to say EMU has boosted FDI within the Eurozone. Successfully operating EMU and UK membership of it on the right basis, would boost FDI over the longer-term. The longer membership of the euro is delayed, gains of increased inward investment are postponed. If sustainable and durable convergence is achieved, then the quantity and quality of investment would increase. How This Effects Zeus If Zeus was to relocate to Europe, there would be decreased production, transport and currency costs however the initial outlay moving into Europe will be costly but allow Zeus to be in the market they wish to operate in. The skills and expertise of the workforce of that county may not have what Zeus require and may cost more money training employees to the standard required. Moving production into a different country may benefit the company as all countries have differing resources, like labour. Zeus will need to evaluate all the factors involved in moving production and decided wheather it would be beneficial for them. Expansion in Europe With more than half the UKs trade with the EU and increasing integration of product, labour and capital markets, the UKs economic interest is best pursued through a deepening cooperation with other European countries as part of the Governments commitment to a strong EU and a successful EMU. As the Prime Minister said in November 2002: We should have more self-confidence because we are a leading European power, always have been and always will be. However, there are implications to expanding a businesses share in the European market. The Governments objectives These global and European trends are mirrored in the Governments central economic objective for the UK to build a stronger, more enterprising economy and a fairer society, extending economic opportunity and supporting those most in need to ensure that rising national prosperity is shared by all. and strategy Stability, productivity and employment opportunity are the foundations of the Governments economic strategy. Since 1997, the Government has taken tough decisions and introduced wide-ranging reforms to establish a platform of economic stability and to promote work and enterprise, tackle poverty and deliver sustained investment to modernise public services. The Governments decision on UK membership of the single currency must contribute to these objectives. The benefits from adoption to the euro depend on trade integration between the UK and the Eurozone through the elimination of currency fluctuations and transaction costs. The UK has increased trade within the EU since joining. Chart 5.3 shows how UK trade with the EU has risen by 5%. The impact of EMU on UK trade, competition, productivity and growth thorugh substantial possible gains EMU membership could enhance productivity in the medium-term by increasing trade and investment and stimulating competition, also helping to promote economic reform in the EU and encourage specialisation in the longer-term. Therefore, EMU could effect the five key drivers of productivity. Based on broad-based evidence on the impact of trade, it seems reasonable to assume that each 1% increase of trade to GDP increases real GDP per head by at least 1/3 % in the long run and perhaps as much as 2/3 %. In a best case scenario, with stability through sustainable and durable convergence, a long-term increase in trade with the Eurozone at the top of the 5% to 50% range and increased investment spurring competition, UK output could be around 9% higher over 30 years within a successful EMU than outside. This could add around 1/4% a year to GDP growth. but not without sustainable and durable convergence Conditional on the achievement of sustainable and durable convergence between the UK and the euro area. Where it is not assured, the trade benefits from EMU would be likely to be at the lower end of the range, meaning gains to trade and competition from membership could be negligible. Estimates suggest a lack of flexibility and convergence in some EU countries. However, EMU has increased trade within the EU by 3% and 20% since 1999. Volatility and uncertainty resulting from EMU membership in the absence of sustainable and durable convergence could have a negative impact on the actual level of UK output in the long-term. The Governments strategy to tackle the barriers to productivity growth and close the productivity gap, involves continued microeconomic reforms in the UK to target the five key drivers of productivity combined with support at the European level for policies to strengthen competition and the Single Market. How This Effects Zeus Expanding into the European market place has two major implications that Zeus will need to consider. Firstly that since EMU, theres increased competitiveness within the EU and Zeus may find it hard to compete if their strategy and overall business is not strong. And when the 10 new countries enter the EU and join the EMU, it could decrease sales and profits even production as their economies are weaker then the rest of the EU and would affect Zeus expansion into Europe. Political Implications There are as expected, political implications to expansion into the European marketplace. In the UK, taxation on businesses is not as high as other EU countries, as the UK government want to promote economic growth. If the EU were to set the level of interest and taxation for all Eurozone countries it may not be beneficial for all countries or their goals. It could be seen as too much involvement and lack of sovereignty power and could cause bureaucracy and federalism. It could be argued that by joining the EMU the UK would lose its economic and political sovereignty; something the UK is not currently ready to give up for the euro and its benefits. To protect their own interests, countries can restrict imports by putting limitations, subsidies, quota or import duties to imports to protect industries. But this does nothing to protract free trade within the EU. Free trade was developed to increase political and economic stability within the EU. How This Effects Zeus Businesses like Zeus will need to consider political implications. Zeus will benefit from the movement of free trade within the EU, and the low taxation within the UK for businesses, however there are other political issues that Zeus will need to consider whether they stay in the UK or move into Europe. These are; o Social policies ~ health and safety standards, holiday/sick pay, working time directive, working conditions etc. o Environmental requirements ~ such as noise and pollution levels, safety fittings etc. o Technological ~ does the technology meet business requirements? do the workforce know how to use the equipment? etc. Recommendation I would recommend that Zeus stay in the UK. When the 10 new countries join the EU, EMU will be affected and it would be well advised to consider in the future expanding into Poland as they are in the centre of the EU and have a highly skilled and are inexpensive workforce to employ. Currently it would beneficial for Zeus to stay in the UK due to the governments objective to build a stronger economy. I would recommend that Zeus seriously look into moving or expansion into Europe and see how this mirrors with current and demand. Bibliography Books Palmer A, The Business Environment, 2002 Mercado S, European Business, Pitman, 2001 Piggott J, International Business Economics, 1999 Davison Purple, The European Competitive Environment, 1995 Websites www.bbc.co.uk/bitesize/business www.gov.org.uk www.offical-documents.co.uk HND UNIT 29: European Business