Main Benefits and Costs of Monetary Union - Essay Example

Thus it eliminates a big hurdle in the way of trade. At the same time, countries get free from any exchange rate uncertainty; get smaller rates of transactions, and more secure price transparency.

A neutral body acts as a central bank on behalf of all member nations of the monetary union. This body is neutral and free from the influence of any nation makes it credible for not only all members of the monetary union, but also for the outside world. For example, European Central Bank acts as a combined central bank of the European Union.

Monetary union is the way of promoting greater economic alliance which is beneficial for all member states and the outside world. For example, it is easy today to deal with a group of 28 countries of Europe at a single platform named European Union.

The monetary union of nations, being a group, is considered more important than that of a single nation. Such kind of unions provides a group of the nation to play an active role in the world affairs

A monetary union can cause economic fluctuation, budget deficits, and not suitable monetary policy if a country is not an optimal currency area.

There is a possibility of any moral or cultural hazard due to differing believes among the nations.

A common dilemma of economic and monetary unions is the fact that an individual member country of the union loses its identity and cultural significance.

The optimal currency area is also known as the optimal currency region. This area refers to single market areas having a single currency across the region. Many elements define the optimality of a currency area (Alexandre Swoboda, 1999). It is important to have these elements to become a member of an optimal currency area. So following is the main criteria for the optimality of a currency area (University of North Carolina, 2009):

- A country must provide free entry and free exit to labor and capital to become part of an optimal currency area.
- A country must provide price and wage flexibility throughout the boundaries of the union members to become part of an optimal currency area.
- A country must provide the authorities and governments to transfer funds or adjust taxation throughout the boundaries of the union to become part of an optimal currency area. Read More