Thesis Chapter 1 & 3 On The Impact Of The Euro On Banking In The UK Before And After Its Introduction
Introduction and Background of the Problem
This paper presents the research proposal on the impact of the Euro to the United Kingdom (UK). Specifically, this research, will discuss the effects of the Euro on banking in the UK before and after its introduction. This research proposal includes the presentation of the topic, the background of the study, the proposed objective of the study, statement of the problem, scope and limitation, and the significance of this study.
The primary objective of this study is to investigate as to what extent the introduction of the Euro affects UK’s economy. For this study, the focus will be its impact on the banking sector before and during the implementation of the Euro. Literature suggests that since EMU introduces the Euro, a series of acquisitions has taken place, and has negatively affected banks from countries outside the Euro. With this, the researcher will examine how the UK banking sector is coping with the challenges posed by countries under the Euro. The researcher will conduct an interview to address these objectives.
The Treaty of Maastricht, the EMU and the Creation of Euro
Originally the Treaty on European Union, the Maastricht Treaty constitutes a turning point in the European integration process. This treaty, signed in the Dutch town of Maastricht on 7 February, 1992 was negotiated between the members of the European Community (EC). As a result, the European Union (EU) was created. Broadly speaking the Treaty sets out the framework for a much more closely integrated European Union. It is this proposals which has upset people concerned at losing sovereignty to Europe. Among the main points set out in the treaty was the promotion of economic and social progress which is balanced and sustainable by creating an area without internal frontiers; promotion of economic and social cohesion and establishment of economic and monetary union, including a single currency. Moreover, the treaty led to the creation of the Economic and Monetary Union (EMU) and eventually to the introduction of a European currency, the Euro.
The Werner report in 1970 Report was intended to pave the way for the establishment of a Monetary Union (Hämäläinen, 1999). However, the proposals of the Werner Report were never implemented. Due to unfavorable world events, it was concluded that a Monetary Union would not be possible. It was revived only in 1988 through the Delors Report, which launched the Single Market programme on the free movement of goods, services, capital and labor. It was supported by a detailed description of an institutional set-up geared towards ensuring stability-oriented economic policies. The Report, after almost 10 years of convergence and technical preparations ensured the successful implementation of the euro on 1 January 1999 (Hämäläinen, 1999).
National Currency and Banking System
As the European Community decided to give up their national currencies in favor of an international currency, the Euro, the European nations voluntarily relinquished some control of their national economies, some element of national sovereignty, in favor of greater efficiency and stability (Blankership, 2002). This decision was a recognition that the world economy is becoming ever more integrated, and that the proliferation of national currencies is neither efficient nor necessary (Blankership, 2002).
The restructuring of the financial system is an integral element of the ongoing economic transformation in Eastern and Central Europe (Mullineux, 1998). This is particularly important because one distinct feature which all transition economies had in common during the central planning era was that a market oriented financial system was almost completely absent (Doukas, Murinde & Wihlborg, 1998). Apart from some informal financing activities, the financial sector comprised a “monobank system” which played a limited role compared to a traditional banking system (Buch, 1996).
At the genesis of the transition period, there was no blueprint for developing a banking sector (Bahra, Green and Murinde, 1997). However, most transition economies started by creating a two-tier banking system, comprising on the one hand a central bank to oversee monetary policy and bank supervision, and on the other hand some commercial banks to perform some form of financial intermediation (Murinde, Agung & Mullineux, 2000). Although the banking systems of the transition economies shared a broadly common central planning heritage, they have had different experiences of bank development during the transition process (Buch, 1996).
Conversion to an international currency from a national one offers important practical advantages, amongst these is stability. The Euro has the backing of the most powerful economies and the most stable governments in the world (Blankership, 2002). While the values of this currency may fluctuate against other currencies, it does so within a certain fairly narrow range, and the chance of disastrous depreciation is relatively remote. People and institutions that hold the Euro can feel secure in the knowledge that the governments which issue them would not risk anything that would result in drastic depreciation of their currency (Blankership, 2002).
At the outset of the transition, the centrally planned economies had extremely rudimentary financial systems which had only recently been transformed, from the Soviet mono-banking model, to a two-tier banking system (Murinde, Agung & Mullineux, 2000). They had only just begun to develop a third tier of co-operative and private sector banks, which were often joint ventures with western banks. Apart from such banks the financial sector was extremely underdeveloped. There were no capital markets or wholesale money and interbank markets of any significance.
Euro vs. National Currencies
On January 1, 2002, Euro notes and coins were introduced; national currencies among member states were gradually withdrawed. Both the Euro and national currencies were permitted to circulate together until June 30, 2002. After that date, and for a limited time only, national notes and coins would be exchangeable only at banks. Thereafter, the traditional currencies will be deemed worthless. And on July 1, 2002, The Euro became the single currency of 300 million Europeans.
As currency is a powerful symbol of sovereignty, of the government's authority over the people, a country giving up its national currency in favor of an international currency implies giving up some of its economic sovereignty. In doing so, governments give up the ability to manipulate the money supply to attempt to stimulate a sluggish economy or cool off one in danger of overheating into inflation. That has always been a dangerous tool, however, and both a deft and light touch is needed to employ it successfully.
Currency removed people from the days of barter and freed them to develop a modern economic system. Nations have adopted individual currencies as their own, stamping the images and symbols of their nation on metal or paper, and establishing a value for them. Control of the money supply has been guarded jealously by most nations since that time, giving them the ability to exercise some influence over their national economies by increasing or decreasing the money supply.
The Impact of EMU in the Banking System of EC and Europe
The EMU and the single currency prevent exchange rate turbulence within the unified market and reduce economic uncertainty for the consumer and business through the elimination of exchange rate uncertainties. Furthermore, transaction costs in trade activities are reduced and price transparency across EMU participants is enhanced, thus contributing to greater competition for the benefit of the consumer. These factors benefit individual consumers and producers, as well as the entrenchment of a favorable and stable economic environment within which trade flourishes (Kyriacou, 1999).
Large and small companies trading into the euro zone from other countries outside it now face new business risks as a result of EMU. Successive waves of mergers and acquisitions affect banks and their corporate customers as a result of EMU. In the longer term the nature and role of corporate banking are likely to be transformed. Some of these potential changes can only be described as revolutionary (Newsletter Interactive, 2001).
Many businesses in the UK, Denmark, and Sweden, as well as throughout Central and Eastern Europe, have yet to appreciate how fundamentally the euro could affect their operations (Newsletter Interactive, 2001).
Statement of the Problem
After the introduction of the euro, the technical changeover to the euro is generally successful. The most important effects of the single currency relate to the improvement of macroeconomic stability and credibility for the policies pursued; these effects are particularly important for the smaller European economies. Moreover, important benefits can be derived from microeconomic factors, such as lower transaction costs, wider and deeper financial markets, improved price transparency and increased competition.
In thinking about the perceived benefits of the Euro to countries belonging to the eurozone, two questions immediately come to mind. First, how do countries, such as the UK which do not adopt euro as their currency, cope with the economic challenges posed by countries from the eurozone? Second, what is the impact of euro in the banking system of the UK?
Specifically, this study will attempt to answer the following questions:
1. What are the effects of the Euro on the monetary, fiscal and banking policies of UK?
2. How does UK’s national currency compete with the Euro?
3. What are the factors that prevent UK from adopting Euro as its currency?
METHODS AND PROCEDURE
This chapter shall discuss the research methods available for the study and what is applicable for it to use. Likewise, the chapter shall present how the research will be implemented and how to come up with pertinent findings.
Methods of Research to be Used
For this study, descriptive research method was utilized. In this method, it is possible that the study would be cheap and quick. It could also suggest unanticipated hypotheses. Nonetheless, it would be very hard to rule out alternative explanations and especially infer causations. Thus, this study used the descriptive approach. This descriptive type of research utilizes observations in the study. To illustrate the descriptive type of research, Creswell (1994) states that the descriptive method of research is to gather information about the present existing condition.
The purpose of employing this method is to describe the nature of a situation, as it exists at the time of the study and to explore the cause/s of particular phenomena. The researcher opted to use this kind of research considering the desire of the researcher to obtain first hand data from the respondents so as to formulate rational and sound conclusions and recommendations for the study.
To come up with pertinent findings and to provide credible recommendations, this study utilizes two sources of research: primary and secondary. Primary research data was obtained through this new research study. Questionnaire survey and in-depth interview was conducted. On the other hand, the secondary research data was obtained from previous studies on the same topic.
For this research design, the researcher gathered data, collated published studies from different local and foreign universities and articles from books and journals; and made a content analysis of the collected documentary and verbal material. Afterwards, the researcher summarized all the information, made a conclusion based on the hypotheses posited and provided insightful recommendations on employee training.
Respondents of the Study
The general population for this study will be composed of 10 bank managers in the UK. The respondents will be asked questions with regard to their perceptions on the impact of the Euro on banking systems. The respondents will come from London since this city is the economic centre of the UK; it is assumed that the greatest impact of the Euro in the UK is manifested in this city. Moreover, London has a positive view in adopting the Euro so it is expected that the interviewees will provide information showing that the country needs to join the eurozone.
Instruments to be Used
The instrument for this study will be a semi-structured interview. Here, open-ended questions will be used to obtain as much information as possible about how the interviewee feels about the research topic. The researcher will encourage the interviewee to clarify vague statements and to further elaborate on brief comments. Further, the interviewer will not share his own beliefs and opinions so as not to influence the interviewees’ answer. The use of the interview will provide the project owner the ability to test the views and attitudes of the respondents.
Validation of the Instrument
For validation purposes, the researcher will initially submit a sample of the set of interview questionnaires for approval; the survey will be initially conducted to five interviewees. After the questions are answered, the researcher will then ask the interviewees for any suggestions or any necessary corrections to ensure further improvement and validity of the instrument. The researcher will again examine the content of the survey questions/statements to find out the reliability of the instrument. Afterwards, the researchers will exclude irrelevant questions and change words that will be deemed difficult by the respondents, to much simpler terms.
Administration of the Instrument
The distribution and collation methods that will be used to manage the questionnaire process would ensure anonymity.
Interviews will take a maximum of 30 minutes. The questions that will be used during the interview will be based on the research questions for this project. The researcher will ensure that the questions will be properly reviewed, refined and approved by the project supervisor.
A content analysis will be drawn from the interviews in order to identify factors pertaining to any sort of conflict present in the UK’s banking system in relation to the Euro.
The following are the initial questions that will be asked for the interview. These questions are still subject for validation, modification and approval.
1. What are the major effects of the euro in the UK?
2. Before the implementation of Euro, how is the overall banking systems in the UK?
3. What are the benefits, if there are any, of the Euro on the UK banking Industry?
4. After the implementation of the international currency, what are the problems, if there are any, encountered by the banking sector with regard to Euro?
5. How does the UK banking sector respond to the impact of the Euro?
6. In terms of banking sector competition with Euro countries, how is the UK coping with the challenges posed by these countries?
7. Does the UK need to adopt the Euro? Why or why not?
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