Harry Bindloss

TRADE GROUPS
Trade agreements can involve two countries reducing tariffs on each others goods, or perhaps reducing bureaucracy by simplifying import/export procedures. Trade liberalisation might involve creating free-trade areas. This creates larger markets, greater access to raw materials, and more competition. The happy ending should be lower unit costs, since firms are able to gain economies of scale. From the consumers point of view, lower prices and greater choice should make them happy too. Types of Trade Groups Customs Union The EU is a customs union. A customs union comprises two (or more) countries which agree to: Abolish tariffs and quotas between member nations to encourage free movement of goods and services. Goods and services that originate in the EU circulate between Member States duty-free. However these products might be subject to excise duty and VAT. Adopt a common external tariff (CET) on imports from non-members countries. Thus, in the case of the EU, the tariff imposed on, say, imports of Japanese TV sets will be the same in the UK as in any other member country. Preferential tariff rates apply to preferential or free trade agreements that the EU has entered into with third countries or groupings of third countries.

Advantages of EMU (European Monetary Union)

Currency stability A single currency should end currency instability in the participating countries (by irrevocably fixing exchange rates) and reduce it outside them. Because the euro would have the enhanced credibility of being used in a large currency zone, it would be more stable against speculation than individual currencies are now. An end to internal currency instability and a reduction of external currency instability would enable exporters to project future markets with greater certainty. This could unleash great potential for growth.

Tourism

Harry Bindloss Consumers would not have to change money when travelling within the euro zone, and would encounter less red tape when transferring large sums of money across borders. Travellers will no longer be forced to change money and pay banks the commission charges. A consumer might wish to make one large purchase or transaction across a European border such as buying a holiday home or a piece of furniture. A single currency would help such transactions pass smoothly.

Business benefits Likewise, businesses would no longer have to pay hedging costs which they do today in order to insure themselves against the threat of currency fluctuations. Businesses, involved in commercial transactions in different member states, would no longer have to face the costs of accounting in different currencies. Surprisingly, small firms stand the most to gain. Experts estimate that currently the currency cost of exports is ten times higher for small companies than for multinationals, who can offset sales against purchases and command the best rates.

Cheaper mortgages, lower interest rates A single currency should also result in lower interest rates as all member countries if the new European Central bank takes on the monetary credibility of Germany's Bundesbank. The stability pact (the main points of which were agreed at the Dublin summit of European heads of state or government in December 1996) will force EU countries into a system of fiscal responsibility which will enhance the euro's international credibility. This should lead to more investment, more jobs, lower interest rates - and for home owners to lower mortgages.

Advantages and Disadvantages of EMU (European Monetary Union)

Fear of recession If governments were obliged, through a stability pact, to keep to the Maastricht criteria for perpetuity, no matter what their individual economic circumstances dictate, some countries may find that they are unable to combat recession by loosening their fiscal stance.

Harry Bindloss Members would be unable to devalue in order to boost exports, to borrow more to boost job creation or to cut taxes when they see fit because of the public deficit criterion. However, the Maastricht Treaty allows for aid packages for euro members whose economy has run into serious trouble.

Differing economic cycles All the EU countries have different economic cycles, or are at different stages in the cycle between boom and recession. The UK economy, for example, is currently growing reasonably well, while Germany is having problems. This is the reverse of the situation in 1990. Critics of Emu say that the creation of a single currency will abolish the policy option to set interest rates separately at the level appropriate for each country .

Language difficulties Experts warn that monetary union can only be a success if the whole area covered by the single currency has the same legal framework (taxation, labour laws etc) and a labour force which is highly mobile. They say that monetary union works in the United States because the labour market is mobile, helped by the common language and portability of pensions etc. across a large geographical area. In contrast, 15 separate countries with widely differing economic performances and different languages have never attempted such a project before. Language in Europe is a huge barrier to labour force mobility. This may lead to pockets of deeply depressed areas in which people cannot find work, while other areas have a flourishing, high-wage economy. While the EU's cohesion funds attempt to address this, there are still great differences across the Union in economic performance.

Loss of sovereignty Loss of national sovereignty is the most often mentioned disadvantage of monetary union. The transfer of money and fiscal competencies from national to community level, would mean economically strong and stable countries would have to co-operate in the field of economic policy with other, weaker, countries, which are more tolerant to higher inflation.

Harry Bindloss Some politicians, especially in the UK, warn that the introduction of a single currency could eventually lead to the end of the nation state.

Cost The one-off cost of introducing the single currency will be significant. The British Retailing Consortium estimates that British retailers will have to pay between 1.7 billion and 3.5 billion to make the necessary changes . Such changes include educating customers, changing labels, training staff, changing computer software and adjusting tills.