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Predicting the impact on Norway if the UK joins the EMU

Date: January 18,  2001
Our ref: 788

“In essence, this means that Norway would become like a small boat in a very large sea, reacting to what other countries do rather than the priorities of their own people.   They would suffer from a very volatile exchange rate, making it impossible for manufacturers and service providers to predict the value of their output.  In other words, it is likely that Norway would have a very hard time if the UK were to join the Euro” concluded Dr McCausland.

(Advance interview details at end of release)
 

The impact on Norway should the UK decide to become part of the EMU is the subject of a major research paper by Dr David McCausland of the University of Aberdeen’s Department of Economics to be launched  simultaneously in Oslo and London on Thursday 25 January.

Dr McCausland’ research was funded by Norway’s  Europa-programmet, an independent, interdisciplinary research centre which focuses on development in Europe and the consequences of that development for Norway and its interests.   Dr McCausland’s paper, together with one written by researchers at the National Institute for Economic and Social Research in London, will be included in the Europa-programmet’s report, “Britan, Scandinavia and the EMU”.

The report deals with the Anglo-Scandinavian group of states which remain outside the EMU.  It focuses on the economic ties between the four countries, looking at potential correlations as a result of continuing to remain outside the EMU.

Dr McCausland explained:  “Developments in Europe are of great importance to Norwegian politics, security and economy as well as to trade and industry.

“The research started in 1998 in response to Europa-programmet’s need to expand its understanding about the UK and its policies, in particular the Labour Government’s warning of a full change over of British European policies after 18 years of Tory leadership.”

“The effects of monetary union on outside States: Britain. Scandinavia and the EMU” studies the effects of monetary union in Europe on outside states such as Norway and the UK.  Dr McCausland and his co-researcher, Dr Ian McAvinchey, also of the Department of Economics, surveyed the likely effects of monetary union, paying particular attention to divergence between the union members and outside states.

A model was developed to identify such effects which were in turn estimated in economic terms using data from the UK, Norway and the current eleven members states.  The effects of a variety of monetary, fiscal and trade shocks were then calculated based on two scenarios, firstly when there are two outsiders – UK and Norway; and secondly with Norway as the only outsider.

Dr McCausland went on to outline the main findings of the research papers:  “If the UK were to join the Euro, although the appreciation of the Krone is reduced in response to fiscal tightening by the EU-11, it would however, lead to an increase in income divergence.  Although exchange rate effects are reduced, real effects (the effects of income and hence employment) are increased in a negative way.  This has serious implications for Norway’s ability to conduct an independent fiscal policy.

“Although we have also shown that the effect of EU monetary policy on Norway is not significantly affected by the UK’s entry to the EMU, the magnitude of exchange rate overshooting of the Krone would increase with the UK’s entry into the Euro zone.  Enforced exchange rate stability within a monetary union area therefore transfers exchange rate volatility to outside currencies and results in increased real divergence.”

Dr McCausland argues finally that the effect on the Krone of asymmetric shocks such as the rise and fall of oil prices, would be increased were Norway to be left without the UK as a fellow outsider.    As with fiscal policy, the effect of the UK joining the monetary union is that asymmetric shocks lead to increased rather than reduced income divergence.

“In essence, this means that Norway would become like a small boat in a very large sea, reacting to what other countries do rather than the priorities of their own people.   They would suffer from a very volatile exchange rate, making it impossible for manufacturers and service providers to predict the value of their output.

“In other words, it is likely that Norway would have a very hard time if the UK were to join the Euro” concluded Dr McCausland.

Although the NIESR paper largely concentrates on the UK, Denmark and Sweden, together the two papers identify interesting differences within the Anglo-Scandinavian grouping in terms of the impact of the EMU and membership.   Sweden and Denmark are largely independent of each other, and of the UK; Norway, is greatly affected by the UK but hardly at all by Sweden and Denmark; and finally, the UK is completely unaffected.

ENDS
Further information from:
Christine Cook, Executive Director of Public Relations, Tel:  01224 272013

Dr McCausland will be available for advance interview on Monday 22 January at 11.30am in the Economics Department Board Room, S51, Edward Wright Building, Dunbar Street.  Refreshments will be provided.

Ref:  788
18 January 2001
 

University Press Office on telephone +44 (0)1224-273778 or email a.ramsay@admin.abdn.ac.uk.