BUS614: International Finance

8a. Explain the membership criteria of the EU and its common currency, the Euro 

• What are the membership criteria for joining the European Union and adopting the Euro currency?

For a prospective country to join the European Union or use the Euro as its currency, it is expected to meet a set of conditions. These differ depending on the membership.

To join the EU area, a country is expected to have an inflation rate no higher than 1.5 percentage points above the rate of the three best-performing member states. It should not be under the excessive deficit procedure. It should participate in the Exchange Rate Mechanism (ERM II) for at least two years. It should finally have an interest rate that is not higher than two percentage points above the rate of the three best-performing member states in terms of price stability.

To join the union, a prospective country should comply with all the EU's standards and rules and obtain the consent of the EU institutions and EU member states and their citizens. In addition, the perspective country should have stable institutions guaranteeing democracy, the rule of law, human rights, and respect for and protection of minorities, have a functioning market economy and the capacity to cope with competition and market forces in the EU, and finally be able to take on and implement effectively the obligations of membership, including adherence to the aims of political, economic and monetary union.

To review, see The European Union, Conditions for Joining the Euro Area, and Conditions for Membership in the EU.

 

8b. Explain the major benefits of EU membership from a financial and economic perspective 

• How would you outline the benefits of joining the EU from a financial and economic point of view?

When a country decides to join the EU and adopt the Euro as its currency, there are multiple benefits to such a choice. For example, countries that choose to join the European Union can enjoy access to a single market with increased economic integration, leading to higher competition, increased efficiency, and intra-EU trade volumes. Member states not only enjoy access to the single market but can also benefit from preferential agreements regarding import and export with more than 70 countries across the globe. This means increased stimulation of the national economy of the new member state through encouraging exports and attracting FDI by creating new jobs.

On the other hand, opting for a single currency also comes with its range of benefits, including ease of price comparison between member states of goods and services, allowing for more competition between member states, facilitating trade internally and externally cheaply, easily, and conveniently. It has improved economic stability, growth, and price stability. Better integration and more efficient financial markets lead to greater influence in the global economy.

To review, see The Benefits of the Euro and Benefits of EU Membership.

 

8c. Predict the effect of Brexit on the UK's and EU's financial market

• How will Brexit affect the EU's Financial Markets and Financial Services Sector?

After the UK departs from the European Union, many of the benefits the UK enjoyed previously will cease to exist. The UK's Banking and Financial industry majorly benefited from passporting rights whereby any financial institution authorized by an EU or EEA member state can trade freely in any other with minimal additional authorization. This gave the UK a competitive edge, and the UK's departure is expected to make trading with securities between London and the EU harder, leading to a possible decline in business.

Additionally, trade difficulties between the EU and the UK are foreseen. Moreover, the UK's economic growth will likely be reduced in the medium and long term.

The UK is expected to encounter many challenges, including the departure of the financial services companies that were once based in London to other EU neighboring countries and the downsizing of the current workforce in the UK's sector.

To review, see What's Next After Brexit? and Brexit and UK-Based Financial Services.

 

8d. Identify the benefits and challenges of Europe as an economic center 

• What are the benefits and challenges of the EU as an economic center?

One of the many benefits of joining a single monetary union is having a single banking union. This also means that monetary stability will benefit from legal protection. On the other hand, it is argued that the policy and regulatory environment of the Euro Zone will likely trigger large inflows of capital from the core into non-core countries that financed rising consumption, partly encouraged by rising wages, as well as a real estate boom.

To review, see European Capital Markets, The Banking Union, and The Crisis in the Eurozone.

 

Unit 8 Vocabulary

This vocabulary list includes the terms that you will need to know to successfully complete the final exam.

• European Union
  • The European Union (EU) is an economic and political union or confederation of 27 European member states.
• Eurozone
  • The Eurozone is the monetary union of 19 states who use the Euro as their currency.
• European Economic Area
  • EEA is an international agreement that extends the EU's single market to member states of the European Free Trade Association (EFTA).
• European Free Trade Association
  • EFTA is an intergovernmental association of 4 European states facilitating free trade between its member states.
• EU Passporting
  • EU Passporting is a system for financial institutions that enables those authorized in an EU or EEA member state to trade freely in any of the other member states with minimal additional authorization.
• Euro Interbank Offer Rate
  • EURIBOR is a benchmark daily rate of average interest rates from large European banks used for lending to one another in euros.