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What could be the expected positive and negative effects of European Monetary Union on a member country's economy - Essay Example

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The establishment of European Union in 1957 has been based on the willingness of the governors of European countries to promote communication and cooperation between the member states in regard to a series of critical political and economic decisions. …
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What could be the expected positive and negative effects of European Monetary Union on a member countrys economy
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Download file to see previous pages The European Monetary Union (EMU) has been such framework. However, the challenges related to the particular plan have been many. In practice, persuading the member states to align their fiscal and economic policies has been proved a challenging task. The gradual implementation of EMU across member states has been considered as a strategy for controlling risks related to this initiative. The incorporation of ‘the principle of freedom of capital movement in the Treaty for the European Union’, in 1993, has been the starting point of EMU. At the next level, two important activities had to be performed for promoting EMU: ‘the introduction of the legislation related to EMU in all member states and the introduction of the common currency, the euro’. These activities that lasted from 1994 to 1998 have been incorporated in the second phase of EMU’s implementation. From January 1999 the third phase of this plan has started; this phase involves in the replacement of national currencies of member states by euro. In practice, it has been proved that EMU can result to both positive and negative effects for member states. The particular issue is explored in this paper.
Reference is made to UK and Spain, as examples, for showing the positive and negative effects of EMU both for countries within the euro zone and for those that are outside the euro zone. In this way also, the potential implications of the entry of a member state in Euro zone are made clear. 2. Which could be the expected positive and negative effects of European Monetary Union on a member country's economy? The participation of countries in a monetary union has been related to a series of benefits. For the member states that participate in EMU these benefits would be also available. According to Albertin (2008) one of the most important benefits of participating in a monetary union is ‘the significant increase of bilateral trade between the countries that have joined such union’ (Albertin 2008, p.3). It is not made clear though whether this benefit can continue in the long term or whether it is related only to the initial period of a country’s entrance in a monetary union. On the other hand, a monetary union can protect its members against strong market turbulences. Indeed, during strong financial crises the countries that are members of a monetary union can easier keep their economy stabilized at the level that their interest rates are not highly affected by the crisis, at least not so high as the rates of the countries that do not participate on monetary unions (Farina and Tamborini 2008, p.152). The recent financial crisis can be considered as an indicative example of the above case; the countries that are members of EMU have managed to protect their economy from extensive losses, mostly because they have been under the protection of EMU (Tausch and Heshmati 2012). The fact that not all members of EMU have managed to secure their economy against the global crisis is not related solely to their participation in EMU but it has been also related to their existing fiscal and social policies (Tausch and Heshmati 2012). In any case, the potentials of a monetary union ‘to protect its members against asymmetric shocks’ (De Grauwe 2012, p.27) seem to be high. Another important benefit of monetary unions is ...Download file to see next pages Read More
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