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Rationale of the Stability and Growth Pact Given the Maastricht Treaty Criteria and its Advantages and Disadvanatges - Essay Example

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Topic: Rationale of the stability and growth pact given the Maastricht treaty criteria and its advantages and disadvantages? Proposals to reform the stability and growth pact? Theoretical framework: Logic for having a common currency According to Robert Mundells’ contribution to theory of optimal currency areas, a monetary union is the more competent method to organise an indemnity scheme where to manage with asymmetric jolts than a system of national currencies with uncertainty in exchange rates…
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Rationale of the Stability and Growth Pact Given the Maastricht Treaty Criteria and its Advantages and Disadvanatges
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Download file to see previous pages These monetary advantages augment in relation to volume of trade and with the intensity of economic integration. As for the cost of the monetary union, it emanates from the savings in loss of the exchange rate as a fine-tuning variable to soothe the aggregate demand. (Quere et al 2010:390).Further, Exchange rate movements are liable to be a basis of asymmetric shocks and Mundells approach found the monetary union as a mode to condense asymmetric shocks and enhance insurance against them (Quere et al 2010:390). As per Mundells, elimination of Transaction costs will be the direct gains whereas price transparency will be the indirect gain. Many empirical studies have shown that there will be many gains from a monetary union and one of the main benefits will be the elimination of exchange rate transaction’s costs as there will be reduction in the size of price discrimination between national markets. (Llirjani 2006:73). According to Taylor (2005), transaction costs will include savings in currency conversion charges , reduction in bank commissions , charges and delays linked with cross-border payments by banks. As per an EU study , the elimination of transaction costs involving conversion of one currency into another is likely to enhance the GDP of the nations concerned by an aggregate of 0.4% for the EU as a whole per annum. (Macdonald 1999:201). Single monetary union will help to attain lower transaction costs as there will be no commission on foreign exchange transactions and there will be an elimination of costs of hedging the exchange rate risk. Under single monetary union, all member nations will enjoy lower interest rates. (Grauwe 2007:78). Many of the analysis of costs and benefits of Europe’s common currency is footed upon the theory of optimum currency areas . According to this concept, the benefits that accrue by sharing a common currency across nations’ frontiers include more uniform prices (price parity), greater certainty for investors , lower transactions costs and increased competition.(Carbaugh 2011 :307). A single monetary union will offer more advantages to exporters as it will put a full stop to domestic currency volatility and a diminution of peripheral currency volatility, which would facilitate exporters to visualise prospect markets with larger conviction. This will let loose a larger possibility for expansion of economy for participants of the monetary union. For instance ,in the recent years , Germany experienced economic development which is footed on vibrant corporate investments and export growth in the export sector(Herr & Kazandziska 2011:194) The chief advantage connected with a monetary union is that there will be welfare advantages due to better prospects or from less uncertainty for companies to maximise their revenues as future returns will be less risky. (Llirjani 2006:73).Further, less uncertainty will also fetch financial stability among member nations. For instance ,it is interesting to observe that Spain, Italy and France attained 100%, 100%, and 68% respectively of their prior-EMU window variances that were greater than the post-EUM variation. (Mafi-Kreft & Sobel 2006). According to Balwin, Skudelny and Taglioni (2005), due to single ...Download file to see next pages Read More
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