Unified European Currency

Unified European Currency

Description

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Benefits of a Unified European Currency

Practical Benefits:

• Transaction Costs: Dealing in a single currency reduces the cost of converting one currency into another. This benefits both businesses conducting international trade as well as tourists. Citizens can travel more conveniently within the Euro area without having to deal with currency conversion. Also, because the Euro is an international currency, it is accepted in many places outside the Euro-area.

Single Market Benefits:

• No Exchange Rate Uncertainty: Eliminating exchange rates between European countries eliminates the risks of unforeseen exchange rate revaluations or devaluations. This provides a more stable trading environment in which business no longer have to consider currency movements in their production costs. It also provides a more predictable and stable financial market.

• Elimination of Various Business Transaction Costs: Including the costs of buying and selling currency, hedging operations to protect from rate fluctuations and a reduction in account management costs (there is no longer a need to maintain accounts in multiple currencies)

• Transparency & Competition: The direct comparability of prices and wages increases competition throughout Europe. Competitive market forces lead to lower prices for consumers and improved investment opportunities for businesses.

• Foreign Investment: Foreign investors can conduct business within the Euro-area with little disruption and benefit from a more stable economic environment.

Single Financial Market Benefits:

• Financial Operation: The Euro increases the market size and operation for financial operators such as banks, insurers, investment funds and pension funds.

• Capital Market: The large Euro zone integrates the national financial markets, leading to higher efficiency in the allocation of capital in Europe.

• Financial Market Competition: Savers benefit from a wider and more diversified offer of investment and saving opportunities while investors can spread their risks more easily, and have the opportunity to engage in riskier ventures. Simultaneously, private and corporate borrowers as well as equity issuers benefit from better funding opportunities because money is easier to raise in capital markets.

Macroeconomic Considerations:

• No Competitive Devaluations: Countries can no longer devalue their currency against other countries in an effort to increase the competitiveness of its own exporters. This is a major contributor to one of the primary goals of the Euro- price stability. The European System of Central Banks operates with full independence.

• Sound Public Finances: With all country’s economies dependent on a single currency, responsible governments have an interest in bringing countries with a lack of fiscal discipline into line. The treaty contains provisions that prevent member states from running excessive levels of government deficits or debts in relation to GDP.

• Strength: The Euro is among the strongest currencies in the world, along with the US Dollar. It is the 2nd-most important reserve currency after the US Dollar. Europe’s role in international organizations, such as the International Monetary Fund, the World Bank and Organization for Economic Cooperation and Development, has also been strengthened by a unified economy and currency.

• Low Interest Rates: The level of interest rates benefits from lower inflationary expectations, improved control of government debt (allowing for increased borrowing opportunities in the private sector) and the increased size of Euro securities markets, which improves liquidity. Also, the elimination of exchange rate fluctuations improves intra-Europe trade, thereby applying further downward pressure on interest rates.

• Shelter from External Shocks: Because between 50 and 75% (depending on the country) of trade takes place within the Euro-area, the unified currency is better equipped to deal with external economic shocks and dramatic fluctuations in exchange rates against the US Dollar and other major currencies.

• Economic Growth, Investment and Employment: All of the aforementioned benefits (price stability, sound public finances, lower interest rates) foster an economic environment conducive to economic expansion, investment and employment creation within the Euro community.

Non-Economic Benefits

• European Identity: A European currency strengthens European identity. The Euro is a symbol of shared values and the successful integration of the nations in Europe.

• Political Integration: The Euro has demonstrated shared identity and acted as a stimulus for further unification. Its success has shown that member states acting in concert and produce universal benefits for the Euro community.

Arguments Against a Unified European Currency

• Interest Rates: A single monetary policy cannot deal with the differences, divergences and cyclical variations in the European economies. National currencies provide an adjustment mechanism, and allow governments to use interest rates to respond to events. A single European currency removes these options. Instead, a single European interest rate, set by the European Central Bank in Frankfurt, would apply indiscriminately to the whole single currency area. This creates the problem of how a participating country could adjust to a shock or economic development specific to that country.

• Labor Market: The labor market in the EU is neither mobile enough nor flexible enough to take the strain of adjustment. Indeed the EU spends much of its time legislating to make the European labor market even less adaptable, as shown by the unacceptable level of structural unemployment in the EU.

• Tax Policy: EU governments cannot rely on their national budgets to alleviate a local or cyclical recession. The Treaty lays down strict compulsory borrowing limits. An active policy of cutting taxes or increasing public expenditure could lead to penalties and fines. Even a passive policy of allowing the budget deficit to rise during a recession could breach the limit and require tax increases and expenditure cuts. So instead of stabilizing the situation, the effect would be to compound the problem and create more unemployment.

• Monetary Transfers: With monetary policy given away, and these restrictions on borrowing, countries in a single currency would be left with transfer payments between Member States. At present these transfers, in the form of structural and cohesion funds, are used to subsidize the poorer EU States. The UK is a very substantial net contributor. In a single European currency transfer payments would take on the much larger task of trying to compensate for changes and shocks affecting the various economies of the currency area. The present EU budget, at 1.2% of GDP, is far too small for such a role.

• Budget Limitations: Advocates of a single European currency who point to the success of the US Dollar are in fact making this point. The US federal budget, through its direct taxation and expenditure powers, exerts a powerful stabilizing influence on the varied states and regions of the USA. A single European currency would require an equivalent EU budget, many times larger than has ever been officially recognized.

• Excessive Fiscal Discipline: When other governments exert pressure on a government to reduce borrowing, or even pay fines if the budget deficit exceeds a reference value, this may have the perverse effect of increasing an existing economic imbalance or deepening a recession.