United Kingdom, Sweden and Denmark on the way to EMU?

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United Kingdom, Sweden and Denmark on the way to EMU?

The successful introduction of euro notes and coins in early 2002 has improved sentiment in favour of the euro in the UK, Sweden and Denmark (EU-3 countries). But it is still an open issue whether and when they will join EMU. The political decision is dependent on the positive outcome of a referendum in each of the three countries. The dates have not been set yet, but there are indications that 2003 may become the “year of decisions”.

It is more for political reasons (rather than economic ones) that the EU-3 have not yet introduced the euro. The governments are in favour of EMU membership in principle, but they cannot be assured of public support in a referendum. The respective populations are concerned about the loss of national identity and monetary decision-making. Opposition to EMU is particularly strong in the UK. In the UK and Sweden, a referendum could take place in spring or autumn 2003. The announcement of a referendum in the UK or Sweden might trigger a second referendum on EMU in Denmark.

The EU-3 countries have to fulfil the same convergence conditions as the 12 EMU member states. However, meeting the convergence conditions should not pose any serious problems. Denmark fulfils all the Maastricht criteria as things stand today. The problem for the UK and Sweden is the exchange rate criterion, which requires smooth participation in the Exchange Rate Mechanism II (ERM II) for at least two years before the convergence test. While the UK (and Denmark) negotiated an “opt-in” clause in the EC Treaty, Sweden did not. Swedish non-participation in ERM II is certainly not in line with the spirit of the Treaty.

The EU-3 countries have managed to stay outside EMU without experiencing large disadvantages. However, they do not enjoy the specific benefits of EMU such as the fostering of trade and investment brought about by the elimination of exchange-rate risks with EMU partner countries, the reduction of transaction costs and participation in a large und liquid financial market.

For the full analysis, see

United Kingdom, Sweden and Denmark on the way to EMU?. For more analysis see theDeutsche Bank Research website.