Advantages and Disadvantages of Individual Currency for a Country - Essay Example

? Scenario al Affiliation Library Research Assignment Scenario There exist myriad advantages and disadvantages to any country that maintains its own individual currency. First, a single individual currency leads to an increased transaction cost. This happens as such countries engage in buying and selling foreign currencies to do business in many regions. Consequently, this leads to increased cost of doing business to several firms involved. For example, the United Kingdom firms spends billions of Euros a year buying and selling foreign currencies to do business in the EU (Anchors, n.d.). Secondly, individual currency leads to reduced price transparency. This poses a challenge to many firms as they find it difficult to compare the prices of goods, services and resources across various regions. This happens due to the distorting effects of exchange rate variations. Moreover, such firms are vulnerable to uncertainty caused by exchange rate fluctuations. This happens as such firm’s tries to invest in other countries with different currency. This leads to decreased investment and inefficiency in business activities. Additionally, individual currency leads to increased costs to industries because such firms will have to buy foreign exchange in their trade activities. This makes such firms unable to compete with other large trading blocs. Furthermore, this form of currency leads to reduced foreign investment (Schadler, 2005). On the other hand, individual currency has an edge to the nation. First, individual currency is more reliable as compared to integration. This helps in maintaining the exchange rate stability in the country. This prompted the UK and Italy to leave the ERM in 1990 as they found the process ineffective (Anchors, n.d.). Secondly, individual currency offers some stability. This is as compared to integration where there exist rigidities. This shows that there are reduced trade benefits to firms once there is no individual currency. Moreover, national currency such currencies help in nation building and fostering of national identities and this helps various firms located in such countries (Stoa, 2008). In addition, the view of government and money as one-entity helps in putting faith to firms and citizens of such countries. In addition, an individual country is essential in maintaining sovereignty. This helps a country to control the actions of its central bank (Stoa, 2008). This also helps the government in controlling its policies and,therefore, able to pursue policies beneficial to its economic and that of its firms. A rich history exists towards the development of a single currency in Europe. Currently, the euro has become part of seventeen member states of the European Union (EU). However, other member states are required to join the union in the future. The first appeal to the achievement of the European currency began before the market crash of 1929 (Europa, 2011). However, this was not realized due to prevailing economic conditions. The other attempt was after the end of Second World War. In Europe, three treaties bringing all six signatory states (Germany, Belgium, France, Italy, Luxembourg and the Netherlands) laid a foundation (Europa, 2011). The treaties led to the establishment of European Coal and Steel Community, European Economic Community, and European Atomic Energy Community. Besides, another summit in Hague defined a new objective of European integration. A task was formed to come up with various suggestions. The taskforce submitted a report in 1971 envisaging full economic and monetary union in the next ten years (Europa, 2011). Some of the recommendations were not adopted, but there was approval to the introduction of EMU in some steps. The first stage involved the narrowing of currency fluctuations margins with no further commitment. However, the US decision to float the dollar posed the challenge on the parities of the European currencies and hence the project was abandoned (Europa, 2011). Other attempts also faced the same challenge. However, there was renewed hope in March 1979 on the creation of the European financial system. This was pushed forward by France and Germany and saw the creation of European Monetary System guided by the concept of fixed, but adjustable exchange rates (Europa, 2011). All other members participated expect the united kingdom. Further, the introduction of EMU was revived in 1988. This was after the Hannover European Council set up a committee to study economic and monetary union. A report was prepared in 1989 and proposed to strengthen the introduction of EMU in three stages. The report focused on the need for better coordination of economic policies, control on the national budget deficits, and an independent institution that was to be responsible for the union financial policy (Europa, 2011). This gave birth to the European Central Bank (ECB). Consequently, the first stage of EMU was launched in June 1989, and this ensured there was full liberalization of capital movements in 1990 (Europa, 2011). Another meeting for an intergovernmental conference and passed various amendments that ensured there was proper EMU. The treaty ensured there was due to the introduction of EMU in three phases. The first phase ensured there was free movement of capital between member states. The second phase ensured there was unification of Member states economic policies and strengthening of Member state’s national central banks. In the third phase, there was the introduction of the euro as a single currency of the member states. Moreover, there was the implementation of a general monetary policy under the support of ECB. This was subject to measures established by the treaty. These measures were binding, and any member state that failed to comply was to face penalties. Eventually, a single monetary policy was established and entrusted to the European System of Central Banks (ESCB) (Europa, 2011). The first two phases are already in place while the third stage is still ongoing. All member states are required to join the last stage and domesticate Euro. Some member states have failed to fulfill the requirement of the last phase and hence enjoy just provisional derogation. As it is today, 17 of the 27 member’s states have implemented the last phase and hence have euro as a single currency (Europa, 2011). This phase has been in place since 1 January 1999. The EMU and Euro have had an optimal performance in the last decade. This is seen in the economic governance of the member states. EMU has ensured that such countries enjoy price stability, improved fiscal discipline. On the other hand, EMU has been faced with criticism on failure to demonstrate improved performance in the real economy. Furthermore, particular elements of the policy architecture have been left hanging, due to failure to unify divergent preferences of some member states (Begg, 2008). Additionally, the Euro Zone has been faced by economic crises such as inflation and excessive government deficits. This shows that the zone has been unable to insulate itself from these challenges as envisioned during its formation. This has been the case in Greece, Portugal, and Ireland. This has been due to higher interest rates, tax increases, and wage deflation that has led to unemployment and recession (Alphandery, 2013). There were changes in the reassigning of the special drawing rights (SDR) because of changing from several European currencies to the euro. First, there was a change in the methods of choosing the currencies in the basket and the weight assigned to each currency to cater for the introduction of euro (International Monetary Fund (IMF), 2000). There was also a change in the instruments used in determining the SDR interest rates. There has also been a change in the criterion of choosing the currencies of those member countries, which are the largest exporters of goods and services. The development has led to inclusion of exports by a monetary union that includes IMF members. There has been the introduction of second selection criterion to ensure that the currencies included in the SDR valuation baskets are among those mostly used in international transactions (IMF, 2000). Since its inception, the EMU has helped in the development of the European Union. First, the single currency has promoted foreign direct investment in and outside the region (The European Institute, 2009). This has been due to reduced exchange rate volatility, more integration and better performance of the institutions. The EMU has also promoted reduction in output and, therefore, has helped the area in accumulating of productive capital. This has helped in economic growth and improved employment rate. There exist some advantages and disadvantages in the achievement of AMERO. On the advantage, there would be increased money supply in the area. Furthermore, foreign investors will gain more confidence in the currency and economy. There will also be decreased trade barriers in the AMERO. On the other hand, this poses some difficulties. First, there will be loss of sovereignty of the member states. There is also likelihood of the value of the currency diminishing leading to a threat to the economy. Besides, politics may take charge due to increased regulation and control. However, I would favor a common currency for North America. This is because it will help member state in saving currency transaction. References Alphandery, E. (2013). The Eurozone’s Agenda in 2013. Retrieved from http://www.project-syndicate.org/commentary/overcoming-the-euro-crisis-in-2013-by-edmond-alphand-ry Anchors. (n.d.). Advantages and Disadvantages. Retrieved from http://library.thinkquest.org/19110/english/advantag/index.html Begg, I. (2008). European Economy. Retrieved from http://ec.europa.eu/economy_finance/publications/publication12319_en.pdf Europa. (2011). Towards a Single Currency: A Brief History of EMU. Retrieved from http://europa.eu/legislation_summaries/economic_and_monetary_affairs/introducing_euro_practical_aspects/l25007_en.ht International Monetary Fund. (2000). IMF Completes Review of SDR Valuation. Retrieved from http://www.imf.org/external/np/sec/pr/2000/pr0055.htm Schadler, S. (2005). Adopting the Euro in Central Europe. New York: International Monetary Fund Stoa, R. (2008). The Single Global Currency: A Developing World Perspective. Quebec: McGill University The European Institute. (2009). Ten Years of EMU. Retrieved from http://eprints.lse.ac.uk/23192/1/GreeSE_No_22.pdf Read More