merits and the demerits of being a member of the European Monetary Union

merits and the demerits of being a member of the European Monetary Union

Introduction

The countries which are members of The European Monetary Union enjoy a lot of privileges by being members of this union. The union is of great importance to its member states. One of these privileges is the transaction costs decrease due to the abolition of currency exchange. The availability of the lower transaction costs makes easy and realization of bigger profits among the state who are the members of the European Monetary Union. The single currency is thus the most notable achievements made by the European Monetary Union; the currency is the euro which is currently used in the international trade. European Monetary Union has influenced the reinforcement of internal markets and reduction of risks concerned with the investments (Stanković, 2013). This act has enabled it to realize a significant benefit which is the elimination of foreign exchange risks. The European Monetary Union has achieved price homogenization which is as a result of the transparency of the prices amid the member states. The role of this work is to analyze and examine the merits and the demerits of being a member of the European Monetary Union. It pays attention particularly to its impact on Eurozone.

There have been various developments in the economic and the monetary union. One of these developments is the Eurozone crisis which occurred in 2018. This paper is going to examine the Businesses which are within the European Union in detail. It pays attention to the processes, policies and the key institutions which are directly involved in the development and theories that explain these developments (Valero, 2009). In one of the financial anniversaries of the European Union, a page on the worst economic crisis will be turned. This is from the history that led to the closure of last excessive deficit procedure and Greek rescue programme while adopting the biggest overhaul of its financial sector over the years. One can find out more about the establishment as well as the advantages and the disadvantages of being a member of the European Monetary Union. There is a positive co-existence amid the integrated trade and the single currency. The European Monetary Union emphasizes specifically on these effects and the trade implications on the Eurozone.

The advantages of Economic and Monetary Union

When Economic and Monetary Union are viewed at a larger angle, they are of great importance not only to Europe but also to the world. These advantages are useful to the companies that are business partners with the European states. Some of these advantages are discussed below:

The reduction of the transaction costs

The transaction costs reduced after the strive to eliminate the need of eliminating the exchange currencies. The reduction in these transaction costs is evident in visible and invisible savings. Visible savings refer to the savings belonging to a company household as a result of the reduction in transaction costs, connected with the of currency exchange by organizations which export or import. On the other hand, invisible savings involves the acquisition of the accountancy, because the evaluation of financial report positions is done in one currency. It should be figured out that the lapse of exchange rate fluctuations narrows possible misuse in the accountancy. Removing exchange rate fluctuations contributes to the objective and just financial report. The introduction of the euro as the sole currency rather than the use of different currencies from different nations, reduction of direct costs of exchange and lower accountancy costs for the corporative sector are related to transaction cost reduction. The Eurozone eliminates the transaction costs. Thus, the members of the Economic and Monetary Union enjoy free travel to any location irrespective of the purpose of that trip. The essence of the single currency is to ensure that the travelers do not spend much of their time converting their money as they travel from one state to another and also to avoid the payment of the currency rates.

The existence of the single currency ensures the people need not convert their currency to buy or sell goods while in another country. The people who are likely to be exposed to transaction costs are mostly the tourists (Eudey, 1998). With the introduction of the single currency, it means that the tourists are not supposed to convert the currency wherever they go. They should not go to banks or exchange offices to exchange their money at a lower a commission.

The euro as an international currency

The mainly notable attainment of the Economic Monetary Union is the euro which ensures that the companies are stable, economy of the state, and confines global currency speculation the euro has been used as an a global currency in recent days. The dollar, yen, pound, other currencies have received hads received a series of impacts due to introcduction of the euro because their worth a decreases on a global level. The use of the dollar as an international currency allows the USA to attain a gain of approximately ten to fifteen billion dollars. Before the introduction of the ero, it was expected that more gain would be brought to EU. The euro has been widely used in the eurozone, and thus it has replaced the dollar completely in these zones and the international trade. It assisted Amsterdam together with Frankfurt to be an adversary to New York, which is known as the Center of Finance. This benefit would have been Grethe later had the UK become a part of the Economic Monetary Union since London is a truthful opponent to New York (Dunn, 1999).

Reducing the risk of exchange rate fluctuation

Risks in the international trade and international investments can be incurred as a result of flexible exchange rates. Econometric analysis is lingered due to the incertitude as well as the variability of the exchange rates. Empirical survey shows that the exchange rates of a nation can be flat with no noticeable changes. However, a vast amount of incertitude can exist for future currency.

Increased price transparency

The Economic Monetary Union has come up with the transparency which is at higher levels in trade among its member states. The achieved price transparency contributes to the homogenization of prices in the European Union, which results in overall reduction of the price level. The reduction of relative price variability should stimulate trade within the Economic Monetary Union and further integration of commodities market and services and also it should promote economic efficiency within the eurozone. The intensive competitiveness is also as a result of the price transparency. It can as well result in higher efficiency in the market which will further cause decreased prices for consumers, and a higher level of competitiveness among European companies globally.

Single market

It has been shown from the pas surveys that there is an existence of a positive correlation amid the introduction of a common currency and trade integrations since having a national currency has been considered as a trade obstruction. The single currency and common monetary policy leave out further competition devaluations according to the above idea. The results are making foreign direct investments to be easy, and assist the advance of long-term business deals, and also they can support some forms of political integrations. The reciprocal trade would be promoted by these results, economic and social integration and business cycle convergence within the economies that use the common currency. Empirical surveys figure out that the euro will cause a boost in trade within the Economic Monetary Union member states for above 50% (Tavlas, 2004).

Preventing competitive devaluation and speculation

Competitive devaluation implies that for a state to export more commodities, it devalues its currency. The trade partners would make the same move as a response to this idea. The concern results from the inflationary spiral regarding currency value, together with improved inflation. Because the Economic Monetary Union objective is to retain the inflation rates at a low level, the introduction of the single currency makes sense. The single currency is used in the elimination of speculation within the Economic Monetary Union member states.

The Disadvantages of Economic and euro Monetary Union.

Cost of adopting the new currency:

A massive loss to the economy has to be incurred to adapt into a new currency. For example, such fees might include the training staff, changing label and customer education costs as well as the change of adjusting tills and computer software.

Difficulty of conversion

Many of the EU countries such as the UK, may be unable to fully converge with the Euro area/ particularly in the UK, it’s difficult for their convergence due to its uniqueness of financial service sector, housing market and because UKs trade circles are close to those of the USA. Besides, UKs labor market is also highly flexible as compared to that of Germany, France, and Spain which also makes difficulty in convergence

Loss of economic sovereignty

Upon a country becoming a member to the euro monetary union, the NCB, Which include the bank of England, definitely lose their capability of using the policy of interest rate to achieve the independent objective of the macroeconomy. Due to the recent global recession and financial crises, which led to the hit of countries such as Greece, rendered the states unable to reduce rates of their interest unilateral. However, it’s clear that any nation assuming the shared currency should give up the fiscal policies to the organ which is responsible for regulating the union. For instance, like in EU, all of the 12 member states had to give up their monetary rights to the ECB which in return decides the fiscal policies for all member states. Generally, this is a massive demerit once some crises occur since they exist in a different situation in their member countries and it’s impossible to handle them similarly. For example, one might look at the incident which might be occurred all of a sudden as a result of increased unemployment. Here the governments’ revenue definitely will reduce since the levies are unpaid to the government by its expected citizens thus forcing the government to raise the taxes to the abled paying citizens thus leading to further disaster.  As such, a decrement in interest rates in such occasions of crises only helps some while adversely affecting others. As a result, it is quite challenging to be in a currency union. For example, in the USA, in the era of 1986 which was waved by fall of oil price, Texas was no exception to avoid the recession.

One cap does not fit all

It is not sensible to be having one cup of an interest rate as far as dealing with a varied array of economic and economies conditions. However, even in a sole exchange area, significant diversities also exist, thus leading to the suggestion that common economic policy might end up being unproductive.

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Dealing with asymmetric shocks

This refers to the external shocks, in this case, the EU areas which have an unequal impact on its economy. For example, in step 2001 the attack which occurred in New York did not affect the entire family of ERO members likewise the collapse of Argentina peso only affected Spain. In such circumstances, there exists no need for a single interest rate. As such a member who experiences negative shock would require looser monitory policy and lower interest rate as compared to the less affected member.

Difference in languages

This is one of the most significant demerits of the monetary union. It decreases labor mobility amongst the member countries. For example, labor is exponentially affected by language barriers in Europe. Also, the union is unable to cope up with the external shocks thus leaving to be rectified by itself within the days’ time which is very difficult.

fiscal policy negative cross-border spillovers

It’s well thought that a national budgetary expansion leads to the rise of savings demand. Here ceteris paribus thus discourage investment by pushing up long-run interest rates. It’s well known that in any integrated capital market which is straightened by the unification of money, such kind of effect spread to other member countries. Thus imposing negative externality. Also, a monetary union might as well generate very new spillovers. Increased domestic purchase by the government which in turn affect domestic products demand, lead to raised local inflation thus pushing the average euro- area inflation up hence forcing the ECB to contract monetary policy entirely in the area. Also. Euro appreciation may come as a result of fiscal expansion thus leading to union member being undermined for their external competitive position.

Conclusion

One of the biggest achievements in the European incorporation processes is represented by Economic Monetary Union. The Economic Monetary Union adds both symbolically and practically to the configuration of a sole, self-governing Europe, where national differences are constructively agreed, and within them exists the free movement of people, commodity, and investments. The Economic Monetary Union is a developmental way of coexistent monetary understanding in Europe which has no contradictions. It depicts ordinary monetary rule, frequent currency, euro and organization amid economic and fiscal strategy. Being a member of Economic Monetary Union is of an giant consequence for each member nation. The following merits are the most vital: transaction cost reduction, euro as the single currency, reduction of exchange rate fluctuation risk, single market, bigger price transparency, prevention of competitive devaluation and speculation. All the mentioned merits have its inference on trade in the Eurozone.

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