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United Kingdom EMU

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HEAD-EMUCountry Analysis

United Kingdom

The probability of the United Kingdom joining EMU at the start date is very high! The political shift from conservative to Labour in Britain has suddenly changed the course of the nation. The new Prime Minister, Tony Blair, will be up for the post of head of the EC in 1998. It will be impossible for him to take that position if Britain remains out of the EMU.Despite the fact that Britain has been out of the ERM, this minor infraction will not stop it from joinging EMU particularly in the wake of the French elections. Germany NEEDS Britain inside the EMU in order to add a counter-balance against the French. Without Britain, EMU is surely destined to collapse.

The British elections were quite heated and both sides promised that a referendum would be held before eliminating the pound. That is the key to Britain’s entry. Entering on the first wave in 1999 will NOT represent the end of the British pound and therefore a refferendum will NOT be necessary. That, Mr. Blair will still promise but only at the end of the trial period come 2002. There is NOTHING that will stop Britain from joing as long as Mr. Blair decides his personal career if more important than his nation.

The strong economic conditions of the UK and its best position of funded pensions within the EU makes this nation one of the best qualified candidates for EMU. The only question for the UK remains the strong consumer boom, which is likely to cause the UK to fail to hit the price stability target. In part, the pound has become the hard-currency alternative to the questionable Euro in addition to the US dollar. Consequently, the boom in the UK is largely being driven by net capital inflows from around the world, which in turn in driving unemployment lower and economic growth higher. However, if Mr. Blair decides to enter the EMU, expect the pound to collapse against the US dollar in the years ahead.

The question of further economic expansion under the new Labour government is a serious one indeed. The proposed “windfall profits tax” is in effect a violation of securities acts around the globe. Such a retroactive tax increase is a serious violation of international law for which nations such as Russia and China have been highly criticsed over the years. This issue alone, should make the new Labour government at least untrustworthy from an international investment viewpoint.

1995 1996e 1997f
ERM Member N N N
Inflation 2.8 2.8 3.1
Budget Deficit / GDP 8.1 3.9 2.9
Debt / GDP 54.1 56.3 57.4
10Y Bond Yields 8.2 7.8 7.5
f=forecast e=estimate

© Princeton Economic Institute