Beside the reduction in transaction costs with the common currency, the euro creates greater price transparency across member states, encouraging arbitrage between price discrepancies. This simply allows consumers to make price comparisons across their national borders/markets easier. Therefore they are in a position to identify unfair price differences, change to a more competitive supplier, inducing integration within the market place and increasing the total volume of intra-trade and thus competition increases and hence efficiency and economic growth in the Euro-zone through economics of scale. The subsequent enhancement of competition will increase economic efficiency and should cause price convergence, thus ending any market discrimination. Frankel and Rose (2002) have also argued that the formation of a currency union such as the European Unions, a member will trade up to three times as much with its partners at the expense of international trade. For the EU this will reduce its dependence on the dollar and other major currencies. The emergence of the EU as a major trading bloc and with the euro being the second most important vehicle currency, with 18.8% of foreign exchange trading, being an advantage from seigniorage which is the ability of the governments in the EMU to obtain goods and services in return for newly created money as the growing Euro-zone economy needs extra money. This will eventually lead to the euro having significant role in financial portfolios worldwide, and as a major reserve currency due to its increasing stability. It has the potential to stabilize the international economic community and promote international trade thus being able to exert more influence in both economic and political affairs on the international stage to defend both these interests.
As well as the elimination of the need to exchange currencies, the uncertainty of exchange rate fluctuations brought to the intra-EU trade and investment diminished. Fluctuations in the exchange rate are again a form of transaction cost, because the uncertainty about the future prices of goods and services make trade between firms from different countries more risky. If a manufacturer in one country and an importer in another make a deal for the products of the manufacturer, the volatility of the exchange rate can pose a major problem in the trade. If one currency falls in value in relation to the other, then the manufacturer as made a forecast error and could end up getting far less for his product than he should have, or the importer could pay much more than was originally agreed upon. (Eudey, pp. 14-15). Eradication of this risk will help international trade, therefore, becoming a more reliable tool for the allocation of resources. Some critics though have stated the fact that euro would still be affected by fluctuations with the dollar, the yen, and any other important national currencies from outside the European Monetary Union which is seen as a cost. The lowering of the exchange rate risk implies that a reduction in the risk premia in real interest rates should be small within the EU, and hence stimulate productive investment through lower borrowing costs in international financial markets. Stabilising this form of exchange rate risk will depend on the co-operation between the actors involved and the EU.
Here we have conditions for business cycles to come together in all the members, since their economies are all tied; enabling a coordinated response the monetary union as a whole can increase money supply to restore full-employment. A secure shield against the economic/financial crisis the euro has proven its ability to act as a protection against external shocks i.e., sudden economic changes that may arise outside the euro area and disrupt national economies, such as worldwide oil price rises or turbulence on global currency markets. The size and strength of the euro area make it better able to absorb such external shocks without job losses and lower growth.
The costs of a monetary union in the EU stem from the transferring of monetary sovereignty from the national institution to a supranational body, in the case of the EU, the European Central Bank (ECB). With the member states relinquishing their national currency they also lose the ability to conduct their individual national monetary policies. This as implications for a nation because they can no longer determine the amount of money in circulation, change the price of its currency through revaluations and devaluations (change its exchange rate), or change the interest rates. Furthermore the second and third costs not only prevent member states from responding to economic problems, but they not help themselves in cases such as regional economic deteriorations.
To develop this analysis of the costs of monetary union in helping us understand it better let us examine the optimum currency area theory, founded by Robert A. Mundell. First consider two countries in monetary union. The first we assume is Italy producing white wine and the second France producing red wine. The countries experience a change in consumer taste preferences increasing demand for red and suppressing that for white, inducing an asymmetric shock. Hence, there is a surplus demand for red in France and a surplus supply white in Italy. The price of red will tend to increase, leading to a general rise in prices in France; equally, prices will tend to decline in Italy, as a result of a fall in the price of white. The terms of trade between Italy and the France deteriorate. In this scenario, with both countries using the same currency, the euro, the ECB will be faced with a dilemma: should it combat the unemployment arising in the Italy or the inflation threatening the France? This dilemma can be resolved using two mechanisms that will automatically restore equilibrium in the two countries. The mobility of the factors of production. If capital and labour shift from the industries that have suffered from a decline in demand toward those enjoying surplus demand, from Italy toward France in our example, balance can be restored in the stability of prices and employment.
However labour mobility among the EU members is limited. Linguistic and cultural differences restrict migration; inflexible housing markets as well as institutionally barriers further this discouragement. Although it has been developing ever since the European Community was founded in 1957 at the treaty of Rome, the single market act was only established in 1986 when a deadline of 1992 was set. This implied the removal of barriers to movement of people so in reality it as only been a short-time period in which free labour movement has been possible. All the reforms are surely the prescription for major problems in the next few years, but they must face the strong opposition of organized labour over such matters as the reduction in social benefits, the increase in pensionable age, and the ability of firms to fire workers when justified by economic conditions—all of which is made necessary by the globalization of the world economy.
The main problem that opponents of a one currency EMU focus on are that one
country can be in a recession, and have no choice but to wait it out. That country would have to wait it out because changing the monetary policy of the whole EMU would hurt more countries then it would help (The Euro, the European, pp. 157). The theory, however, is that by creating a single currency economy throughout Europe, the economies will be tied together, and the business cycles will slowly come together. If the business cycles of all the countries were in sync, then there would be no fear of one country being in a recession, while the others were economically stable (The Euro: Expec., pp. 123).
There are other ways of dealing with economic problems in individual countries. Even though a country gives up its right to change monetary policy, it still retains the
right to change its fiscal policies. This means that EMU countries will still be able to
change how much tax the people pay. If it a member state experiences difficulties then the national governments of other EMU member can raise their taxes therefore increasing the purchasing power of those members, who are then in a position to help out its neighbour. They can also expect help from the European Union budget but is only a small amount accounting for only 1.2% of EU GDP.
Probable creation of serious problems for peripheral EU regions and nations. That is, greater economic and financial integration, which the move toward the euro will entail and encourage, is likely to increase the geographical concentration of economic activities at the core of the EU area where sound infrastructure and the main market are located enticing large firms. These benefits are not present in peripheral regions and lead to increased economic inequalities between the centre and the periphery. Southern Italy, Scotland, Northern Sweden, and even entire peripheral countries, such as Greece, Portugal, and Finland, are likely to become relatively poorer.
Specifically, peripheral areas and countries are likely to lose their best-trained professionals, who would be attracted to the higher salaries and the better career opportunities in the EU core areas inducing further loss of specialisation.
Similarly, because of the smaller risks and the likelihood of higher returns, the savings of the peripheral areas may flow to and be reinvested in the EU core regions.
It will also get increasingly difficult for industries in peripheral areas to effectively compete with EU core. Such progressive relative impoverishment of peripheral areas is evident with many EU member nations, but the process is likely to gain momentum as the European Union moves toward a truly integrated system. EU regional policies to help peripheral areas are not likely to be sufficient to reverse the trend toward greater interregional inequality.
Many firms will have to increase in size to obtain economies of scale, so that they may be able to compete.
Finally, the inevitable result will be decreased national income and increased unemployment in the peripheral economies.
The financial market crisis which started in August 2007 subjected the EMU to severe economic and political fragmentations. So far the EMU has worked far better than many sceptics expected even with the rapid slow down in inter and intra- EU trade. The benefits compared to the costs are quite clearly more favourable for the EU Since the EU implemented the euro in 1999-2002 the members of the EMU have increased from eleven to sixteen, with EU members increasing to twenty-seven. These first EMU members not only elected to be apart of the first truly integrated monetary system it the birth of the euro but its member have also grown, showing that many countries have found that they too came conclusion that the advantages exceeded the disadvantages. Confidence and positive speculation in the euro have been stimulated from the growth in trade, stability, and relatively low inflation during the last eleven years. Even the major recession of the last decade and only hindered its growth with the euro having strong exchange rates with both the pound sterling and the US dollar. The only worrying thing for me is the negative effect the EU is having on the periphery. The introduction of the European Monetary union and euro as signalled a momentous step in the intensification of globalisation. With the integration of capital, labour, trade being at the heart of EU develops the future for the EMU looks healthy.
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