The Impact Of The Eurozone Crisis To Non-Member Economies: The Case Of The UK
Table of Contents TOC o “1-3” h z u
HYPERLINK l “_Toc329133480” Abstract PAGEREF _Toc329133480 h 2
HYPERLINK l “_Toc329133481” Table of Contents PAGEREF _Toc329133481 h 3
HYPERLINK l “_Toc329133482” 1. Introduction PAGEREF _Toc329133482 h 4
HYPERLINK l “_Toc329133483” 1.1 Background PAGEREF _Toc329133483 h 4
HYPERLINK l “_Toc329133484” 1.2 Thesis Statement PAGEREF _Toc329133484 h 4
HYPERLINK l “_Toc329133485” 1.3 Aims and Objectives PAGEREF _Toc329133485 h 4
HYPERLINK l “_Toc329133486” 1.4 Research Rationale PAGEREF _Toc329133486 h 5
HYPERLINK l “_Toc329133487” 1.5 Hypothesis PAGEREF _Toc329133487 h 6
HYPERLINK l “_Toc329133488” 1.6 Justification PAGEREF _Toc329133488 h 6
HYPERLINK l “_Toc329133489” 2. Literature Review PAGEREF _Toc329133489 h 6
HYPERLINK l “_Toc329133490” 3. Methodology PAGEREF _Toc329133490 h 9
HYPERLINK l “_Toc329133491” 3.1 Research Action Plan PAGEREF _Toc329133491 h 9
HYPERLINK l “_Toc329133492” 3.2 Procedure for Why Eurozone Crisis Is a Threat to Global Economy PAGEREF _Toc329133492 h 10
HYPERLINK l “_Toc329133493” 3.3 Data Collection Tools PAGEREF _Toc329133493 h 10
HYPERLINK l “_Toc329133494” 3.4 Results PAGEREF _Toc329133494 h 11
HYPERLINK l “_Toc329133495” 3.5 Analysis and Interpretation of the Data PAGEREF _Toc329133495 h 13
HYPERLINK l “_Toc329133496” 4. Conclusions and Recommendations PAGEREF _Toc329133496 h 15
HYPERLINK l “_Toc329133497” 4.1 Conclusions PAGEREF _Toc329133497 h 15
HYPERLINK l “_Toc329133498” 4.2 Recommendations PAGEREF _Toc329133498 h 16
HYPERLINK l “_Toc329133499” 4.3 Areas Future Consideration PAGEREF _Toc329133499 h 17
HYPERLINK l “_Toc329133500” References PAGEREF _Toc329133500 h 18
HYPERLINK l “_Toc329133501” Appendix PAGEREF _Toc329133501 h 19
AbstractThe European Union faces one of the most difficult challenges since its increased financial arrangement under the EU, which apparently has some members left out due to their national interests. The UK is an example of the EU nations outside the Eurozone, but the impact of the Eurozone crisis currently witnessed does not appear to be selective. Contagion impact fast catches up with the UK and as the recessionary impacts continue to threaten smaller economies in the Eurozone, bigger economies outside the Eurozone cannot feel safe anymore. This project interrogates the impact of UK’s policy towards the Eurozone and the potential risks faced by the rest of the world. The unofficial interviews conducted on the UK’s delegation to the recent European summit in Brussels finds out how the opinion of the policy makers favours direct involvement of the UK into the Euro crisis. From the findings, a conclusion to the effect that the UK must improve its Eurozone policy is formulated.
1. Introduction
1.1 Background
Opinion has emerged that the United Kingdom limited terms of involvement of the European Union in the Eurozone when compared to other economic powerhouses does the economic crisis in Europe more harm than good. On the other hand, proponents of the peripheral role that the UK has taken in resolving the economic challenges in the Eurozone claim that it is the best approach available for the domestic economy. Various perspectives taken on the debate however fail to quantify the magnitude of the costs and benefits that the UK policy presents to its domestic economy and development. In a comprehensive deliberation on the various risks involved in determining the most sustainable approach for the Eurozone and the UK, this research project embarks on a consultative interrogation of cues to make a conclusion as proposed by the thesis.
1.2 Thesis StatementThe hands-off approach adopted in the UK’s Eurozone crisis policy affects the recovery progress of the domestic economy as well as reduces the value of confidence shown towards stability of the Eurozone monetary and fiscal ambitions.
1.3 Aims and ObjectivesThe project aims to enumerate the significance of a unified and homogenous contribution of the European economic powerhouses to achieve the real benefits of the Eurozone. Specific aims and objectives of the project therefore involve:
Aims
Highlighting the importance of full economic cooperation and contribution by Eurozone members and other European economic powers
Establishing the volatility of a disjointed contribution by the EU and of the economic body
Objectives
To demonstrate the risks faced by the Eurozone by virtue of UK’s peripheral presence in its economic matters
To support UK’s direct involvement in the Eurozone using cost-benefit analysis
To attribute Eurozone’s current poor recovery from debt crisis to disharmony in membership contribution
1.4 Research Rationale
The dominant debate in Europe currently revolves on how the political governance and leadership have failed to deliver sustainable development to overcome the economic volatility occasioned by recent economic crisis. Governments continually find it difficult to overcome their liability in public debt fueling the Eurozone debt crisis yet the measures implemented today seem as volatile as the entire crisis. Cooperation of German and French governments in the resolution of the economic crisis facing the Eurozone appear as the only positive indication that the powerhouses of the European Union can turn around the volatility of the economy. The bail-out plans proposed to rescue national governments’ ability to meet their expenditure cannot continue without the appropriate support from all the great economies of Europe.
1.5 HypothesisLack of homogenous cooperation from across the UE and Eurozone will bring down Eurozone economic framework.
Null Hypothesis
Integration of more EU nations such as the UK into the direct resolution of Eurozone crisis will slow down economic development in Europe due to the risks involved.
1.6 Justification
The UK plays an integral role in the EU and despite the fact that it is not a part of the Eurozone economic arrangement, a majority of the nations in the Eurozone constitute virtually half of its export market. Under the considerations of the blow that economic crisis to the largest single market destination, closer cooperation with eth Eurozone cooperation from the UK than currently underway would protect vital economic interests. Such involvement would support the UK to mitigate the impact of the crisis better than a hands-off approach due to contagion influence currently experienced.
2. Literature Review
The debt crisis in the Eurozone emerged when the debt potential of nations across the Eurozone expanded within the platform of unified monetary and central bank systems. Inability of the Eurozone to set borrowing regulations due to lack of proper policy systems regulating tax and revenue regimes across the jurisdiction opened loopholes in the GDP to debt balance. According to Williams (2012, para.8) smaller economies borrowed more than they could raise leading to the debt crisis, with countries such as Greece and Italy borrowing above their GDP (160 percent and 120 percent respectively). Bigger economies in the Eurozone such as Germany and France found themselves overwhelmed by bail-out calls and reluctance of the EU nations outside the Eurozone to support them went increasingly futile. However, the negative impact of such a crisis poses a threat to the whole of Europe and potentially the entire world and action of European economies, together, cannot be underestimated. If Germany’s direct involvement is anything to rely on, the UK needs to hinge its recovery from supporting ailing economies to recover too (Fhbrussels 2012, para.6). Exclusion of the UK from a direct role as Germany and France sends mixed reactions on the stability of the foundations of European economy. Perhaps a tighter cooperation between the European nations as led by the big economies would send the desired optimism among the Eurozone members. In view of the importance of the stability of the Eurozone to the economy of the UK, all considerations to secure the resolution of the crisis outweigh any conservative ideology that defies such integration debates.
Since the beginning of the Eurozone crisis, the United Kingdom has distanced herself from what is happening. In the late 2011, 26 European leaders out of the 27 European Union member states supported budget and tax pact to address the Eurozone debt crisis. The United Kingdom refused to join others. This is because the Prime Minister David Cameron argued that he had to protect the key interests (financial markets included) of the British. All the 17nations using the euro accepted the deal while nine nations indicated that they would sign up. The 26 member states have suggests that the euro is very stable and its use is for the common good of the Eurozone. Though Britain agreed that the euro was for the interest of the country, Cameron (Prime Minister of the United Kingdom) did not sign the treaty because it did not offer proper safeguards for the United Kingdom (Morris 2011, p1).
Since the occurrence of the euro crisis, appeals for the European Union referendum have become gradually important. A recent survey suggests that approximately 80% of the Britons want the vote. The Prime Minister of the United Kingdom cannot ignore the developing pressure coming from the Conservative ranks. The crisis has developed a new political momentum in the euro zone and Britain must respond to it. If Britain fails to respond, it will be at a risk of becoming disregarded as a non-member of the European community. Cameron promised his critics a tough stance in Brussels. Cameron argued that the short-term concern for Britain is to offer support to euro zone in resolving its crisis. The interest of Britain is a fiscal union, a banking union, and euro bonds. However, he was quick to note that he would not assent to the necessary changes made in the European Union treating without getting concessions in return (Evers and Volkery 2012, p1).
Possible risk to the financial and legislation support needed to keep Europe united is the series of legal challenges by the defenders of constitutional rights and Eurosceptic politicians. For instance, the constitutional court of Germany has had to deliberate contribution in the primary Greek financial rescue programmer and the validity of various financial stability measures. The rulings suggest that such challenges are not likely to disrupt the process. Nations such as Estonia and Ireland are also making challenges. Despite the efforts made to restore market confidence, most of the people contemplate the probability of a nation (nations) leaving the Eurozone. It seems that contingency plans for different possibilities are being made behind closed doors. However, it is important to note that there are no provisions that permit a nation to depart from the Eurozone, however, the provisions can be added through amendments. However, this process cannot happen overnight, it will take a considerable amount of time (Noked 2012, p1).
3. Methodology
3.1 Research Action Plan
Activity Action
Task dates The task was done in a period three months. In the first month, a personal interview with David Cameron (The Prime Minister of United Kingdom) was done. Other activities included include random distribution of questionnaires to various government officials and finance officials concerning the issue of Eurozone crisis.
In the second month, analysis of the personal interviews and questionnaires was done and the results compiled.
Review dates The tasks were reviewed in the third month. The tasks reviewed included the interview done, questionnaires filled and the results of the whole process.
Monitoring process The participants were monitored on a weekly basis. The method for monitoring was the participant monitoring. The participants were required to fill out weekly monitoring forms during the research period.
Research strategy The research strategy used was personal interviews and the use of questionnaires. The data collected was analysed using SPSS (Statistical Package for the Social Sciences).
3.2 Procedure for Why Eurozone Crisis Is a Threat to Global Economy
The resources for the research came from donations and grants offered by the university, organizations and interest groups. The results of the research were analyzed using statistical tools such as SPSS (Statistical Package for the Social Sciences). The reliability of the research procedures were measured by the extent to which they yielded similar results on repeated trials. In this case, a number of trials were made to test the reliability of the research procedures. The validity of the research was measured by the extent to which they answered the research questions, for instance, if the respondents were capable of answering questions concerning Eurozone crisis. The variable’s (Britain) approach was negatively affecting the Eurozone.
3.3 Data Collection Tools
The data collection tools used in this research included personal interviews and the use of questionnaires. These tools assisted in answering the research questions. However, there are important things to note about these data collection tools. The data generated from these tools was qualitative in nature, that is, it was in the form of words. In designing the questionnaire, the following things were taken into consideration; theme and cover letter, instructions for completion, appearance, length, order, coding, and the type of questions (Thames Valley University 2012, p1). The theme and cover letter of the questionnaire was based on the research questions. The theme was “why the United Kingdom was a threat to the stability of Eurozone.” A cover letter was written to explain all things concerning the questionnaire and how it was to be conducted, and how the information was to be used. The length of the questionnaire was moderate since not many questions were asked.
Coding was important since the data collected was to be analysed using a statistical package. The questions used were simple, short, and to the point. It is worth noting that open-ended questions were used. This is because they permitted further elaboration of the matter or issue by the respondent. Questions used and answered in this case included; how safe was the United Kingdom from the Eurozone crisis, how the crisis affected nations like the United States. As stated before, the questions used were based on the hypothesis and the research questions. The questionnaires were distributed to the randomly selected government officials and finance officials who attended the recent forum at Brussels and were collected in a period of one week.
In personal interview, unstructured form of interview was used. This form of personal interview was very important since it resulted in thorough elaboration of the question or the issue. When planning for the interview, some things were taken into consideration. All areas that required information were listed. The type of interview used was unstructured personal interview. The areas had to be transformed into real questions (for instance, was the United Kingdom safe from the Eurozone crisis?). The last things taken care of included making an appointment with the respondent. In this case, the respondent was the Prime Minister of the United Kingdom, David Cameron. Thus, unstructured personal interview was used to collect information from the Prime Minister.
3.4 ResultsFindings relied on the data collection techniques employed in the research, mainly the Eurostar statistics provided for the various European nations’ economies and the interview responses collected from the UK delegation to the just concluded European summit in Brussels on 29th June 2012. The timing of the venue was appropriate since it was possible to find the government officials in a single sitting as opposed to making several appointments in an ordinary setting. The British prime minister and three other treasury officials from the delegation were interviewed on an open ended questionnaire to find out their opinion on UK’s policy to the Eurozone. Coding the data for appropriate qualitative procedures gave the following interpretation on need to change Eurozone policy.
Respondent Support of current policy Support of further cooperation
1. 6 4
2. 4 6
3. 7 3
4. 2 8
5. 5 5
Total Score 24 36
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Despite the official opinion of the UK government that the EU direct involvement into monetary and fiscal policies was a risky engagement for the European nations, support for the Eurozone nations provided a beneficial position for the nation a majority of the respondents. It was apparent that the general reluctance of the UK to engage in a more direct financial role in the EU was a political motivation as opposed to an economic development decision. The political debate generated across the UK points at a possibility of a long battle between the supporters of the Euro debate. According to the British Prime Minister in his interview, it is not entirely a lost battle for the Eurosceptics to continue holding a position against further involvement of the UK into the Eurozone debt turmoil since there are benefits of protecting UK as it stands (personal communication). However, the score of this opinion from the rest of the delegation indicates that there are sympathizers opting for a more direct involvement than currently practiced.
3.5 Analysis and Interpretation of the Data
The analysis resulting to the coded classification of qualitative data was based on using logistic regression. Logistic regression is a method of analysis in SPSS. Logistic regression can be used to assess the relation of multiple independent variables and a dependent variable. In this situation, the dependent variable was the United Kingdom (Britain) approach and the multiple independent variables were nations from the Eurozone. In logistic regression, binary dependent variables are required. The variables are usually coded 0/1 and they suggest if a condition is present or not, or if the event happened or did not happen. For instance, if the variable is coded zero, the event probably did not happen and if it is coded one, the event probably happened. It is important to note that there are two values of dependent variable (non-occurrence or occurrence) and they are important in the prediction of the possibility of something occurring. In other words, logistic regression finds the association between the independent variables and the possibility of occurrence. It is worth noting that logistic regression is effective at approximating the possibility that an event will happen. As stated before, logistic regression develops estimated for the probability that an event will happen under given set of conditions. Logistic regression has the capability of constructing multivariate models and takes in control variables (Grace-Martin and Sweet 2008, p158).
From the data collected it was evident that the lack of homogenous cooperation for the European Union will bring down Eurozone. Thus, the hypothesis was supported by the data collected. Most of the respondents were of the opinion that the hard stance by Britain not to involve herself in the affairs of the Eurozone was not beneficial to the stability of the Eurozone. They also suggested that Britain was too cautious that its interests would be threatened if it was to agree to the treaty. Although Britain had admitted that euro would bring stability to Eurozone, the nation was still adamant that it would not jeopardise her interests. Personal interview with the Prime Minister of Britain generated some information of the unwillingness of the United Kingdom to indulge herself into the affairs of the Eurozone. The Prime Minister noted that the interests of Britain were not considered when the treaty was formulated, and thus, it will not take part despite the fact that it was beneficial to the nations in the Eurozone. He also stated that the referendum vote was not important at that moment because it would change Britain’s association with the European Union.
The Prime Minister was quick to state that even if Britain was to be removed from the European Union membership, it will not affect the stability of the Eurozone. However, these sentiments differed from what finance officials stated. The finance officials indicated that the stance held by Britain would affect the stability of the Eurozone. They also stated that Britain was slowly being affected by the Eurozone crisis. The sentiments were supported by the increasing pressure by the Conservatives to have the referendum vote. Thus, from the results gathered, it was evident that Britain’s stance was going to affect the stability of the Eurozone. Other than affecting the stability of Eurozone, the stance was also going to affect the stability of Britain, politically and economically. Based on logistic regression, Britain (a dependent variable) was going to influence the stability of the Eurozone. The variable Britain was coded one, thus, the probability of the event occurring was very high.
4. Conclusions and Recommendations
4.1 Conclusions
Despite the fact that the UK government faces a divided house a home on the foreign economic policy with special attention to the Eurozone, a coordinated approach backed by national interests in the rich market must take centre stage and precedence over political arguments. Indeed, the entire continent as well as the entire global economy faces a difficult and trying economic period of recent history that can only find a solution in the type of cooperation that puts every European’s interest at heart. A segregated approach as practiced by those states that want to protect their local currency must face appropriate condemnation if the economic gains provided by the Eurozone to such nations do not facilitate the formulation of a desirable economic decision.
As illustrated from the outcomes of the interviews conducted to the respondents as given in the data section above, the mixed opinion from a government delegation ought to provide a homogenous portrayal of the interests of the British people. However, the misinterpretation of the underlying issues for Britain’s involvement in Eurozone acts as the major hindrance towards mitigation of negative impact emerging from the ailing economies. To support the opinion of the delegation, as divided as it is, a lot of work needs to be done to convince the UK leadership that the conservative interests of the nations should not continue to pose threats to national development as well as that of the rest of the EU.
4.2 Recommendations
The most advisable route to be taken by the European nations, led by the UK should involve a more powerful involvement in financial affairs of Europe, with a cost benefit analysis forming the main decision anchor. Nations in the EU, both members and non-members of the Eurozone must integrate their development contributions towards stability of the EU and Eurozone. Supporting the main market where most of the EU nations conduct international business will not only be a show of goodwill and confidence in the EU but also a responsibility of every nation to the rest of the world. In terms of the debate going on in the UK on whether to have a more direct role in the EU, political interests must not hijack national interests in terms of the gains that the nation stands to lose if the Eurozone comes down collapsing. It will increasingly appear tenable and logical for stronger economic ties to be established for better cooperation inside the EU as opposed to individual segregation of nations that would be occasioned by a collapse of the Eurozone. Withdrawal of the small economies from the Eurozone must be discouraged as their isolated recovery projector would be worse than when in the assistance of other nations within the Eurozone. Firmer actions such as austerity plans to reduce excesses will increasingly form part of recovery paths in Europe as opposed to risky borrowing, which forms a huge part of the fear possessed by the UK. In view of the recent developments in the Eurozone management, bail-outs delivered to nations worst hit by the impacts of the debt crisis have stringent compliance regulations to alleviate risks of default, which captures the fears of potential supporters such as the UK.
4.3 Areas Future ConsiderationThe conversion of the EU into a better monetary bloc will eventually be a tricky path for the UK to isolate herself and time will be ripe for the appropriate preparations to be made in case the unconceivable came knocking. Despite the fact that the idea of entry into the Eurozone seems unpleasant by nearly all of the population in the UK, testing times still lie ahead for possible complications in case the bloc continually isolates Eurozone non-members. The UK can only work towards a better cooperation with the rest of the Eurozone in a setting likely to favour an isolated capacity as opposed to moves that seem to undermine the integrity of the Euro.
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Grace-Martin, K., & Sweet, S. A. (2008) Data analysis with SPSS: A first course in applied statistics, Boston, MA: Allyn & Bacon.
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Noked, N. (2012) The Eurozone crisis and its impact on the international financial markets [online]. Available from: <http://blogs.law.harvard.edu/corpgov/2012/06/19/the-eurozone-crisis-and-its-impact-on-the-international-financial-markets/> [accessed 3 July 2012].
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Appendix
Questionnaire
1. What is the impact of the Eurozone to the UK’s economy with respect to considerations of improved interaction with the EU?
2. Is the current UK’s involvement in the EU responsible to the volatility of the economy in Europe?
3. Are there ways in which the UK could enhance its role in resolving the Eurozone crisis or is it beyond its economic scope and responsibility?
4. What are the indications that the UK will increasingly integrate into the Eurozone affairs?
5. Are there ways in which the Eurozone management would facilitate its own security and that of non-members such as the UK?
