The euro has many effects on businesses and the consumers not only within the Euro zone but also out of it. Firstly I will discuss the advantages of the single currency inside and outside of Europe.
THE SINGLE CURRENCY
The euro has many effects on businesses and the consumers not only within the Euro zone but also out of it. Firstly I will discuss the advantages of the single currency inside and outside of Europe.
The first advantage is cheaper transaction costs the single currency will allow countries in the euro zone to trade with each other without changing currencies. This will reduce (but not remove) the transaction costs. It will cost less for companies to make payments between countries within the euro zone. Firms in the euro zone will notice the greatest difference. However, businesses from outside the euro zone which trade with companies inside it will also notice the effects. Easier trading would mean that some countries can specialise in one good or service whilst other countries specialise in others. This would mean that there are more goods available to consumers at a lower price, and lower prices means people have more money to spend on other goods, so there will be a higher standard of living. Also, goods would be able to be transported for a cheaper price between participating countries. So by joining the European currency, there would be more trade available and therefore a wider choice of goods and services to choose from.
Secondly there will be greater price transparency, the single currency will make price differences in different countries in the euro zone more obvious. This may affect companies who charge different prices for their products in countries within the euro zone. On the other hand, companies buying from the euro zone will be able to compare prices more easily. Either way, this will sharpen competition
The third advantage is that there will be stable exchange rates, the single currency will remove exchange rates between countries in the euro zone. This may lead to better decision making for its companies. If UK companies purchase products priced in euro the exchange rate risk may be transferred to them. It is possible that some domestic UK businesses which do not currently experience exchange rate risk will do so in future.
Another main benefit is that a fixed exchange rate would act as an anchor against inflation.
The single European currency's ease of trade ...
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The third advantage is that there will be stable exchange rates, the single currency will remove exchange rates between countries in the euro zone. This may lead to better decision making for its companies. If UK companies purchase products priced in euro the exchange rate risk may be transferred to them. It is possible that some domestic UK businesses which do not currently experience exchange rate risk will do so in future.
Another main benefit is that a fixed exchange rate would act as an anchor against inflation.
The single European currency's ease of trade would allow the easy establishment of Trans National Corporations (TNC's), this would create more jobs for more people all over Europe. This would mean that benefits would be lowered, as not as many people need to claim them. The money saved from benefits would mean that more money is available for public spending, so public services, such as the NHS would be able to offer more quality services. Therefore creating positive externalities.
As you can see there are many positive aspects to the single currency, however this does not tell the whole story. There are also many disadvantages of the euro.
Firstly the cost of transitioning 12 countries' currencies over to a single currency is a very big disadvantage. Billions will be spent making and distributing the new currency, also changing over accounting systems, software, printed materials, signs, vending machines, parking meters, phone booths, and every other type of machine that accepts currency.
Training will need to be taken by employees, managers, and even consumers. Every government in and out of the eurozone will be affected by the costs of the transition. This task will require many hours of organization, planning, and implementation.
The chance of economic shock is another risk that comes along with the introduction of a single currency. On a macroeconomic level, the objectives have been controllable in the past.
In the past governments could adjust spending such as unemployment and social welfare programs. In times of economic difficulty, when more people are claiming benefits, the government's spending increases to make these payments. This puts money back into the economy and encourages spending, therefore taking them out of a recession. Because of the Stability and Growth Pact, governments are restricted to keeping their budget deficits within the requirements of the pact. This means they are limited to spending during economically difficult times, and therefore limiting them to pull the country out of recession.
With their own currencies, countries could adjust interest rates so that people would invest more and buy on a larger scale. The euro will make interest-rate adjustments by individual countries impossible, so this form of recovery will be lost. Interest rates for all of Euroland are controlled by the European Central Bank.
They could also devalue their currency by adjusting their exchange rate. This devaluation would encourage foreign countries to buy their goods, which would then help bring the economy back to where it needed to be. Since there is no longer an individual national currency, this method of economic recovery is also lost. There is no exchange-rate fluctuation for individual euro countries.
The strength and stability of the euro will have an effect on European business, as well as the business environment worldwide.
A strong euro that trades at higher levels will strengthen imports for Euroland countries by allowing them to purchase more for less money. This means businesses that rely on imports for parts and supplies are better off.
A weak euro that trades at lower levels than foreign currencies will mean that exports from Euroland will be less expensive for foreign buyers. This also means that other foreign manufacturers will have to compete against those low prices. If the euro becomes to weak than there is a chance of a recession
The euro's strength is affected by supply and demand. There are several factors that affect where investors place their money, including the overall stability factor. Indicators like unemployment levels and overall inflation rates are also considered.
The exchange rates are also considered. Trade among the countries that make up Euroland will probably increase in relation to trade with the rest of the world, simply because it will be so much easier than it was before. However, both imports from and exports to non-Euroland countries will probably increase less rapidly. When a country imports more than it exports, it runs a deficit in its current account, which isn't attractive to investors because it doesn't indicate long-term stability. Current account surpluses, which result from higher exports than imports, are viewed an indicator of a strong currency.
Interest rates also have an affect on investors. High interest rates mean high returns, but they may also mean inflation. There is a fine line between these two, and investors have to balance the risks accordingly.
The euro also affects the U.S. dollar. Euroland now has the second strongest economy in the world, and the highest level of world trade. This could establish the euro as a new reserve currency, and could cause a shift in demand from dollar-denominated markets to euro-denominated markets.
Another factor that affects the balance of the business world is the fact that growing countries that are trading with Euroland countries will begin invoicing in euros. This will mean that these areas will be known as euro trading zones.
A third factor that may strengthen the affects of the euro and impact worldwide business is the new freedom for expansion that Euroland manufacturers and other business firms now have. This growth opportunity will allow them to use economies of scale to their advantage and create highly competitive markets that didn't exist before the euro.
While the euro may not help some of the problems within the Euroland countries themselves (such as unemployment). It will bring about an opportunity for growth that has not been possible in the past. It is anticipated by most that the euro will promote expansion and growth that will make European stocks as attractive to investors as others.
