EUROPEAN SINGLE CURRENCY

European Single Currency



European Single Currency

Introduction

The European Union must make important decisions and changes in order to improve its function and effectiveness for its member states. However, not all changes can be smoothly integrated into the existing form of the European Union. In the long term therefore, these changes may prove to challenge its very existence (Vanthoor 2002, 12 - 19).

The euro's most ardent backers--the governments of Germany and France and Europe's business community--argue that a single currency will lead to increased trade and stronger economic growth throughout Europe. EU officials estimate that the euro will eliminate some $20 billion in finance charges on monetary exchanges alone. Euro proponents say that the currency unit will facilitate trade because buyers will be able to more easily compare the prices of similar products from different countries without having to calculate currency conversions. Pricing and billing between businesses in EU countries is expected to become much simpler.

In addition to the euro's direct benefits, proponents say, the newly created EMU, and the fiscal discipline that countries will have to display to remain part of it, will ultimately help European governments to reform their economies. Most EU governments have already moved to rein in public spending, balance their budgets and bring down inflation to qualify for entrance to the euro. A few governments, such as those in Spain and Italy, have significantly reduced public spending and privatized formerly state-owned industries. Euro backers hope that the requirements of EMU membership will prod more governments to dismantle what they say are overly generous welfare states that foster economic inefficiency.

So-called euroskeptics, however, are not convinced that a single currency will be good for Europe. Euro opponents come from both sides of the political spectrum. Leftist political groups are concerned that euro participation will mean higher unemployment and a skimpier social safety net. They base those concerns on the austerity measures--reductions in government benefits, for example--that their governments have already taken in an attempt to qualify for euro membership. They oppose the euro for the very reasons that some favor it--because its adoption may spur governments to relax strong labor laws that have protected workers' wages and jobs (Mundell 1961, 657-665).

Question 1

The phrase 'single European currency' simply denotes a European, shared economy in which most of its member states share the same currency in order to accelerate integration within Europe (Salvatore 2002 ,121-36). Although this is a concept quite simple to understand, its actual effects are more complicated and difficult to analyse.

Advantages of Euro

Advantages

It has eliminated the uncertainty linked to the variability of exchange rates as they disappear among the eurozone countries. Disappeared on exchange rate risk on investments and transactions, so that these will increase in the eurozone: there will be more investments and transactions between Spain and Germany, for example.

It eliminates the costs and hedges between eurozone countries, which is

Greater price transparency and lower inflation.

More competition in the eurozone.

Merging of financial markets and stronger euro.

Decreased interest rate, result of the ...