Advantages Of The Euro Currency - Essay Example

Advantages Of The Euro Currency A). Discuss the benefits and the problems of the European single currency, the euro. The Euro was introduced in 1999 with the aim of integrating European nations. Its use was implemented in two phases; first, as a virtual currency to assist in accounting and in payments that did not involve hard cash. The second phase was implemented in 2002, with the Euro appearing as coins and banknotes (EU, 2008). To date, it is the single currency shared among 15 European Union (EU) Member States and there are both pros and cons presented by the European Monetary Union (EMU). Although the EU member states share the single currency, they each are accountable to their own financial systems and as a result, the Euro present different impacts on each economy. The greatest advantage of the Euro is that there is regional currency stability due to the fixed exchange rates. The Euro has led to price stability within the EU characterized by low inflationary trends and stable public finances. This has increased the credibility of the Euro due to large currency zone thus stability against the speculation. This credibility is reinforced by a common monetary policy that is governed by the European Central Bank. Currency stability has encouraged trade as there is a reduction in both external and internal currency instability. The single currency eliminated the risks involved in exchange rates making importers and exporters better placed to make accurate growth projections in foreign markets. Businesses no longer pay hedging costs as an insurance against currency fluctuations. They are also spared against the costs incurred as a result of accounting across currencies. Small businesses are the greatest beneficiaries as they would otherwise incur greater costs as a result of currency fluctuation, unlike large multinationals that enjoy the benefits of economies of scale. This has encouraged entrepreneurs and Small and Medium Enterprises (SMEs) operators’ to trade beyond geographical boundaries and expand their businesses (BBC News, 1998). The single currency has encouraged tourism as people are spared the task of currency exchange thus red tape procedures are eliminated. This means that tourists are not at risk because of carrying huge sums of money and do not encounter extra charges because of commissions (BBC News, 1998). It has enabled individuals to trade beyond their geographical locations and compare prices. The internet has made this even better as one can easily shop for the best offer on a product or service. Even traders who are not involved in international trade have benefited substantially as sub-contractors have engaged importing goods thus forcing a series of price reductions. The Euro has been instrumental in oiling the European economy’s gears as it has opened up doors to free trade and reduced the unemployment rates. This has seen the Euro zone protection against external economic turbulence such as the increasing world oil price. The Euro has encouraged political integration as a result of the creation of an economic state. It has resulted in the formation of a community that is founded on economic grounds and this has ensured that any political drawbacks are quickly forgotten. It has been deemed as virtuous that economic powers have concentrated their economic and monetary resources. Finally, the Euro has given the EU a powerful presence and common voice in the global fora and in international organizations such as the World Bank, International Monetary Fund and such structured organization. The citizens of the EU Member States have been provided them with a visible symbol of their identity. However, the Euro has several critics. Firstly, the Euro has disabled the ability of EU Member States to devalue its national currency or adjust prevailing interest rates in response to favorable economic adjustments as this policy is under the sole govern of the European central Bank. Europe is a diverse in terms of its productivity rate, labor markets, capital and financial structures, social security systems and industrial specializations. Since the interest rate adjustment is limited to the European Central Bank, labor mobility or wage rate or prices are force to adjust downwards to carter for the needs in interest adjustments. Since the member states have no control over their monetary policies, they are forced to use fiscal policies as a national response to economic demands. This implies increased taxation and national expenditure, which results in civilian up roar. Essentially, economic instruments that have traditionally been used to regulate overall economic events have been rendered useless by the single currency. B). Explain what effects might the present rise in the value of the euro relative to other currencies such as sterling and the US dollar have on Euro zone members and their non-Euro trading partners. The present rise in the value of the euro relative to other currencies such as sterling and especially to the US dollar has led to increasing economic tension that is reminiscent of the 1930’s Great Depression. This is fuelled by the fact that world currencies are under pressure to boast the attractiveness of their products both on local and global platform (Lefebvre, 2003). The rise of the value of the Euro has been brought about as a result of an increase of its demand in foreign markets. The strength of the dollar has led to an increase in trade in the Euro zones as traders within the Euro zone find goods and services within other markets relatively cheaper. Low prices translate to increased demand and thus increase in imports from foreign markets. This benefits EU Member State importers as they obtain the cheaper goods from foreign markets, offer them to consumers within their local markets at lower prices. A decline in the prices results in an increase in the quantity demanded and this translates to profits. Unfortunately, the exporters within the Euro zone pay the prices of a stronger currency as there is a decline in the demand of goods and services. This harms the main EU Member States revenue earners as they are forced to reduce their prices so as to remain relevant in the global market place. There is an economic slow down as the production levels go down as the domestic prices seem higher in comparison to the foreign markets. The difference between an increase in imports and a decline in exports is called a trade deficit. The most obvious resultant effect is that here is a reduction in the GDP of the Euro zone states. The same is true for European businesses with a US presence as their profits loss value when converted to their own currency. The rise in the Euro has lead to a divergence of tourists from Euro zones to non Euro zones. There is pressure on the European Central Bank to cut the interest rates so as to stop the increase of the Euro (Lefebvre, 2003). The rise in the value of the Euro in comparison to other world currencies has enabled EU Member States to invest more in foreign markets and has led to a ‘fire sale’ in the US market. This phenomenon has raised concerns within the US congress as some affected industries have direct contact with Homeland Security and crucial infrastructure systems. The rise in the Euro has raise the question as to whether interest rates should be the cause of structural changes or let the structural changes come due to increased economic growth. The problem with the rapid tightening of monetary policies too regularly is that it leads to uncertainty and wads off investments. Unfortunately, since the Euro is the single currency for the EU Member States whose monetary policy is controlled from a central location, the effects cut indiscriminately across the board. BIBLIOGRAPHY. BBC News (1998). Special Report EMU: The Advantages. Last retrieved from the World Wide Web on the 6th of July, 2008 from http://news.bbc.co.uk/1/hi/special_report/single_currency/66473.stm. European Union (2008). The Euro. Last retrieved from the World Wide Web on the 6th of July, 2008 from http://ec.europa.eu/economy_finance/euro/our_currency_en.htm Lefebvre A. (2003). US-Europe tension grows as Washington talks down the dollar. Last retrieved from the World Wide Web on the 6th of July, 2008 from http://www.wsws.org/articles/2003/jun2003/doll-j04.shtml Read More