The Establishment of the European Union - Coursework Example

European Union The establishment of the European union has given its member s numerous adavantages and has helped them progress into a unified entity that cant be challenged. From agriculture to political, the member states share policies that are not only mutually beneficial but also essential to further unify and strengthen the body. Of these advantages, one of the most important advantage can be termed as the economic aid and nurturing of the member states. Though there are, like always, twos sides of this coin too, most argue that the economic integration has had a positive advantage to the states. The advantages that the member states have are worth an elaborate description and this would be followed shortly. First however lets first mention the euro and the European Monetary Union. The Euro, which is a common currency shared among 16 out of the current 27 member states has had a significant impact onto the union body. Around five countries also generally accept the currency even if they do not recognize it officially. Naturally as European Union constitutes some of the most major countries of the world, their medium of exchange has a significant impact onto the exchange market. It is arguably, the second most traded and important currency of the world after the U.S. Dollar. Although accepted by all the euro accepting countries, the European Monetary Union constitutes of 12 countries out of the 27. They share policies and affects. The member states act as a unified economic body and their macro and micro implications and choices are termed and analyzed as one. Now, why would one want to commit oneself to an economic body? What advantages does it have? More importantly what is there that attracts and inspires other countries and unions to it? The first and foremost advantage of the same currency policy is indeed the reduction in transaction costs. To do business, even with the neighboring countries, one has add on additional amounts to the host country so that one’s currency is received there. It was estimated that to do business, the member countries used to spend around 1.5 billion pounds every year to buy and sell foreign currencies so that the visiting people could have money at their disposal. This however was more problematic for the members were naturally inclined to trade with their neighboring countries so as to cut on the transportation costs. However, the cost of transaction eventually reduced the amounts of revenue generation and profits and left them less motives and inclinations to trade. The same currency policy however, by the introduction of the Euro, gave the members the liberty to practically go along the border and do business with the same money that was in his/her pocket all the time. They did not have to worry to go to a money exchanger and use the local currency instead of what was at their disposal. A related advantage of the said introduction of the same currency policy is the reduction of the conversion costs. The money exchange market, eventually kept its share of commission when one had to convert the currency. By introducing the same monetary unit, not only did they reduce the transaction costs but also decreased the conversion cost to 0. Now, the same money that they had back at home could be used elsewhere and across borders. Not only did this increase the consumer surplus by a considerable amount but also increased trade among the countries. This acted more what as incentives and motivations to the laid back and lazy potential business men and women to trade between the countries. All this eventually played its part in the increase in GDP, decrease in unemployment and yes indeed economic growth for both the countries. Another advantage of the same monetary unit ala Euro is the price transparency that has been brought with its introduction. Keeping in mind the worries of potential traders, there was always this fair of sometimes over and indeed sometimes underestimating the prices of the different currency across borders. Great hassle had to be bore so as to convert the amount into local currency and to convert the local amount into the respected currency so as to determine what had to be paid. This invited impatience and agitation, resulting in discouragement of the traders. However as the same unit was introduced, the firms and the individuals could compare the prices of the services, goods and resources all present across borders with no difficulty whatsoever. Also as all the countries share the inflation rate too, there were no worries of their respective currencies loosing value as they moved across the borders. Now they don’t have to worry about the exchange rates and merely trade whenever they want, with their money maintain its worth. Obviously, as mentioned above, the members do not have to worry of the fluctuations of the exchange rate. It is but a common phenomenon that the currency’s value is altered according to the Foreign Exchange market or Forex for short. The Forex determines what prices the currencies must enjoy as related to each other. This in turn decreases or increases the value of the currency and gives the holder power at his disposal. This however is a risky business for there are occasional fluctuations of the Forex market. Ergo once has to bear with the fear of loosing precious value of his currency and not being able to buy as much as they had wanted to before. It also decreases the value of assets in one place or another, creating huge problems for the individual who hopes to sell used assets. All this does eventually have negative economic effects on the business and individuals and results in a loss of trade. By issuing the same currency the individuals and business are saved from the hustle and fear of fluctuations of the exchange market and invest in assets with confidence. Now as the European union is termed as a union; a body that is unified under policies that are spread out around numerous and countless fields and aspects, it is suffice to say that there is a single market across the union. However it seems rather absurd to use different currency across the same market. It obviously brings with it numerous problems, most of which have been discussed in detail above. Ergo, there is absolutely no need to use different currencies in the same market and instead go by the Euro which invites ease in trade and exchange. By introducing the Euro, not only has the countries taken advantage of what has been discussed above but also become unified. By issuing the Euro, the countries have brought a mega giant competitor to the already dominating currencies of the Unites States of America and Japan. Both the dollar and the Yen have acted and dominated in the Forex world and by introducing the Euro, the European Union has declared that it is not but depended on anyone else outside the union. These claims though seemed hollow in initially at the start, have proved their strength and today Euro acts and is seen as a dominant force in the Forex market. By unifying the countries that were once brutal enemies during the past world wars have assured each other, even if silently, that here wont be any more wars. By promising this, not only do the countries enjoy the relief of less hostilities but has also been able to divert most of its precious assets and money from the useless expenditure for preparation of a potential war and defense purposes and have instead injected into the economy. This has given the countries numerous advantages such as more liberty to indulge in research and development and be innovative and bring out ideas that are not only profitable to the country itself but also the whole Union. This brings with it, the political agenda which obviously in many ways effects the economical policies. By acting as a body, the economic bodies can better guide and judge polices. There is a single central bank in these countries, The European System of Central banks, that now handles the monetary policies and thus keeps the euro high and strong away from what might result in its devaluation or depreciation. Also, by becoming one, the companies are in a better position to act dominantly in the economic markets and acts as monopoly and oligopoly where necessary to attract the maximum revenues and take advantage of the most profits with in reach. By having control of the important economic institutions, they were able to handle inflation so brilliantly that last year, 2009 the inflation rate reached 0! By adapting policies to high inflation rate countries such as France and Italy, the authorities were able to avoid the repeated devaluation of the franc and lira which would have had terribly negated the advantages of the fixed exchange rate system. Germany’s central bank, the Bundesbank also followed suit and eventually met the monetary targets set up for the member countries of the Union. The independent central bank of Germany was used as an example to establish the role of the European System of Central Banks that are now significantly more dependent and indeed better able to handle issues such as inflation. However, as mentioned earlier, even this situation has a negative side to the coin too. There are indeed disadvantages to the union. The first and foremost disadvantage to the situation is the instability of the system. What one ahs to understand is that this union unifies strong economic bodies and countries. It is always difficult to guide and lead strong individuals or countries and the European Union is indeed trying to do just that. The great Britain for example, more popularly known as the United Kingdom argued throughout the 1980s that there was absolutely no need for a unified monetary union for according to it, it was impossible to maintain the fixed exchange rates. However later around 1990, it did add itself to the union which gave the monetary union a chance to prove itself. However around 1992, the United Kingdom once again left the system along with Italy thus proving its point at instability when it came to handling the exchange rates. Secondly, most economists argue that there is an over estimation of the trade benefits. They argue that the followers and supporters of the monetary union are in a habit of exaggerating the gains out of this union. However, most argue that the new policies would bring in little advantages or blessings and thus there is no need for such an introduction for it is going to affect countless lives and all the countries associated with it. The loss of sovereignty has been the most important and highly debated disadvantage of the same monetary body. It is argued that an independent central bank would not, at all appreciate the power of the democratically elected governments and thus would not be able to portray what is demanded and expected by the people. They argue that a considerable amount of power would be lost from London to Brussels. By this procedure, naturally the national governments than have to act slave to the policies set up by the central bank of the European Union and thus have to follow it blindly. This is, as it is an insult to the sovereignty of the governments and is highly discouraged along the member states. There are too the deflationary tendencies. In the 1980s France brought down its inflation rates but with the expense of higher unemployment. There was an unnecessary prolonging of the recessionary period in the 1990 and 1992. This was all done to ‘stabilize’ the system and had its affects, most negative on the member states. However, if one is to analyze the advantages and disadvantages, while focusing more on the greater bigger picture, it is suffice to say that the advantages truly and greatly outweigh the disadvantages of the policies. Indeed the arguments against it cannot be ignored but than again it can never be a ‘win win’ situation. It is rather natural to loose some to gain some. In the case of the European Union; I t has indeed gained a lot! Reference: Staab, A. (2008)The European Union explained: institutions, actors, global impact. USA: Indiana University Press Read More