The UK and the EMU: An Economic Examination of the United Kingdom as a Relevant Factor of Success for Europe to Achieve Economic and Monetary Union

Currently the United Kingdom is not participating in the European Monetary Union. In 1992, it decided to “opt-out” of the first of three stages set out in the Maatricht Treaty that some European countries began implementing in an attempt to move the continent closer to monetary union. The people of the United Kingdom will have the chance, in 2003, to decide the United Kingdom’s role in the EMU eleven years after it first deferred its membership. If this upcoming decision were to be made on an economic basis, the degree of integration between the United Kingdom’s economy with the EMU countries’ economies would need to be determined because of the relationship economic integration shares with the costs and benefits of joining a monetary union. In this paper, I first develop and discuss a model of costs versus benefits of a country that joins a monetary union. I then discuss the recent history of the road to monetary union in Europe. Finally, I simulate the economy of the EMU zone by examining three economic variables—inflation, unemployment, and real GDP growth of three EMU countries—Germany, France, and Italy. After gathering this data, I determine the degree of economic integration between these EMU countries and the United Kingdom by running regression and correlation analysis on the data. To provide a basis of comparison, I performed the same analyses with the United States’ data. By performing the analyses with both the United Kingdom and the United States, my goal V was to indicate the relative degree of economic integration of each to the EMU countries. I used both the United Kingdom and the United States because I felt that it would enhance the validity of my conclusion simply by having a comparison measure. In addition to running the regression analysis using the individual countries’ data, I also performed a regression analysis using the average of the three countries’ data for each year’s variable to mitigate any problems of multi-collinearity that could appear in the first round of regression analysis. In the regression tests that used the averaged data, the results indicate that the United Kingdom is more closely and thoroughly integrated with the economies of Germany, France, aind Italy than is the United States. The correlation analysis further enhanced the validity of these findings. Therefore, I conclude that—according to the cost/benefit model I established—^the United Kingdom is in a better position to benefit from joining the European Monetary Union than is the United States because of its relatively high degree of economic integration and correlation with the economies of Germany, France, and Italy, the chief economies of the current EMU