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.