Euro Union


a house made out of folded Euro notes

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The United Kingdom will vote on 23 June on whether or not to leave the European Union and there is a sense in which what they may be leaving is the Euro Union. Of the 28 countries in the European Union 19 are already in the Eurozone, 7 are committed to working towards adopting the Euro, and only 2 are exempt from joining the Euro: Denmark and the United Kingdom. The world's third and sixth largest economies are in the Euro, respectively Germany and France, while the United Kingdom as the fifth largest economy has retained its own currency. Among the 7 countries who are outside the Eurozone but committed to join (Bulgaria, Croatia, Czech Republic, Poland, Romania, and Sweden) there is a strong support for the United Kingdom remaining within the European Union as it is a very powerful voice for those outside the Eurozone. Nevertheless a European Union committed to having most members in the Eurozone could benefit greatly from the United Kingdom's departure. The Euro has been in crisis since the global economic collapse in 2008 and although Ireland has recovered well the southern European states remain in difficulties. A major problem for the Eurozone is that it is trying to have one currency for multiple economies with only limited shared policy making. The move to shared policy is heavily resisted by the United Kingdom because it means changes being made from which it cannot benefit because of its retention of sterling as a currency. A shared currency can only prosper if other items are shared, but this is hindered by a situation of some countries in the European Union sharing the Euro and some not sharing it. The creation of the Euro was part of the move towards ever closer union and only made sense within the context of all European countries moving in the same direction, but with first the United Kingdom and later Denmark gaining exemptions from the Euro the single currency begins to look like a mistake. By creating the single currency and not signing up all member countries to it the European Union created a structural weakness in both the union and the currency. The easiest way to fix the problems with the Euro would be to allow the United Kingdom to depart and consider where that leaves Denmark's membership due to the Euro exemption they were given to get the Danish populace to support the Lisbon Treaty at the second time of asking.

This raises the issue of the status of the financial power house that is the City of London. Many of its major players warn that they might leave for the Eurozone if the United Kingdom departs the European Union. Yet that begs the question as to why financial institutions were basing their access to the European single market outside the Eurozone. The saying having their cake and eating it comes to mind. As the Eurozone sets its financial house in order it is likely that pressure will increase for those institutions to move within the Eurozone and such a move has been mooted by the major Euro powers of France and Germany. Voters in the United Kingdom could choose to remain within the European Union in order to preserve the golden egg that is the City of London, but find that foreign financial institutions leave anyway because the United Kingdom loses its lustre as a European base because of its exemption and long term intentions to remain outside the Eurozone. On the other hand it may well be that those financial institutions have little interest in being based in a country signed up to an insecure currency and that a post-Brexit City of London would continue to be the most promising European base due to the solidity of sterling.

There is an argument that the crisis in the Eurozone was created by its coming into being. Once poorer parts of the European Union came under the same currency as the wealthy German banks there was the possibility of loans that were previously unobtainable. This worked to the benefit of both the governments of those states and the shareholders of the German banks. That ability to tap into German credit was a large contributing factor in the success of the Celtic Tiger blossoming of the Irish economy. The problem was that those economies were unable to cope with the stresses caused by the financial collapse in 2008 and this presented a huge problem of contagion for Germany due to the exposure of its banking system to now tottering economies. So the European Central Bank pursued a policy of austerity in those countries to place the emphasis on them paying back German banks rather than having the crisis spread to the the Eurozone and European Union's economic powerhouse. Being part of a single currency limits the options that those poorer economies have to survive and austerity became the method largely because the strict rules for Eurozone economies left so few other options. Lessons have been learnt, but they are difficult to implement while austerity continues to punish those economies that have already suffered the worst impact, especially in relation to unemployment. Maybe if there was not a large economy outside the Euro it would be easier to find a way to stabilize the Eurozone and as the United Kingdom is unlikely to join the Euro it might be best if it left the European Union.

© Mercia McMahon. All rights reserved