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Advantages and Disadvantages of Adopting a Single Currency: The Euro


Introduction
The European Union is an economic and political grouping of 28 member-states in Europe. The
market has a population of around 500 million people and accounts for 23% of global GDP. The
union has its origins in 1958 through its predecessor European Economic Community which had
six members. The current name was adopted in 1993 and ever since membership has increased to
include countries that were previously viewed as non-European such as Turkey. In 1999, the
union established the Eurozone as a monetary zone and was enacted in 2002 with the currency of
choice named as the Euro. Of the 28 EU members, 18 members belong in Eurozone. The
European Central Bank (ECB) was established to regulate its flow as a recognized legal tender in
the market. This move for a single currency brought with it benefits and costs to individual
countries with some losing and others gaining as identified relevant literature on the topic.
Benefits
The move to have a common currency in a common market eliminates the costs of currency
conversion and fluctuation of prices owing to nominal exchange rate fluctuations. Differences in
currencies have been noted as one of the most prominent hindrances to trade. Economist John
Stuart Mill even once observed that
So much of barbarism, however, still remains in the transactions of the most civilized
nations, that almost all independent countries choose to assert their nationality by having,
to their own inconvenience and that of their neighbors, a peculiar currency of their own
Angyal 2009, p. 109).
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The move to have the Euro was thus intended to address this barbarism noted by Mill and
enhance trade among EU members.
The removal of these foreign exchange challenges has increased foreign direct investment
activity in Europe. According to the World Bank, FDI flow in and out of the Eurozone has
increased impressively. In fact, the rate increased by 20% between 1998 and 2001 compared to
the period between 1995 and 1998. A considerable amount of many is saved by adapting the
euros in the Eurozone. It is roughly estimated that the common currency saves about 0.05% of
total trade between a country and a non-Eurozone member. However, the cost of forex to
international business ranges from 0.06% to 0.1% of the GDP.
Majority of this growth is attributed to intra-EU investments, removal of pricing challenges using
different currencies across international borders, ease in meeting in house cost calculations and
financial reporting requirements, and exchange rate volatility (Sousa & Lochard, 2011).
However, a model developed by Head and Ries (2008) shows that firms consider more about the
possibilities of mergers and acquisitions in foreign countries as opposed to other factors such as
currency. Data from the field also indicates that the Eurozone countries invest more in non-
Eurozone countries than in Eurozone countries.
The optimum currency area theory predicts that regional markets that adopt a common currency
register increased economic activity. This theory predicts adaption of a common market,
specifically in the Eurozone contributes to 0.08-0.012% growth in the GDP (Bancevicius,
2010). This theory is based on the assumption that the adoption of a common market allows
easier flow of factors of production. However, in the case of the EU, Bancevicius reports that
the flow of labor as a key factor in production has not achieved full mobility in the region as a
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result of strict immigration laws. In most cases, the laws target the comparatively less developed
Eurozone members such as Slovakia and Slovenia. These countries have been late entrants to the
EU and Eurozone which technically means they should benefit most from the common currency
according to the optimum currency area theory.
The other benefit is to discipline economic policies to address inflation. This is based on the fact
that the European Central Bank (ECB) has more responsibilities in keeping economic discipline
in the sense that t has responsibility to a larger number than in the case of individual countries
which seek to position their currencies in a position that benefits them but likely to hurt other
members of the union or its trading partners.
Costs
The cost of Euro to member countries is of course loss of freedom in enacting key economic
policies. With the Euro as the national current being shared by the rest of the Eurozone members,
it means that the national monetary policies are infective in stabilizing any national economic
shocks. This is a huge disadvantage in that it denies individual economies some degree of control
in influencing the national economic climate. Some economists have pointed the adoption of the
euro which resulted in giving up of monetary autonomy as being responsible for the predicament
facing some countries in Eurozone such as Spain. To avoid such repercussions, Beetsma &
Giulodori (2010) argue that the cost of giving up monetary autonomy should not supersede the
trade, institutional and political benefits gained from it.
The loss of a countrys ability to issue and regulate its foreign reserve means that the country
loses a source of revenue. Member countries, through their central banks, still get some
seigniorage which is most beneficial to the comparatively poorer economies. Nonetheless, the
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fact that the members lose control of their seigniorage implies that they lose their seigniorage
revenues. This issue has created sensitive debate among members with some members concerned
about the loss of seigniorage revenue. For instance, Greece expressed serious concerns about this
issue upon joining the Eurozone (Bancevicius, 2010). Intriguingly, a loss of the ability to inflate
away the domestic-currency debt has been cited as one of the problems that has affected Greece
in the recent past which is blamed the countrys membership to the Eurozone (Bulr &
Hurnk, 2009).
Loss of Seigniorage control implies loss in ability to control monetary policies as
aforementioned. Therefore, member countries have to operate in a fixed exchange rate regime
which can affect domestic and international business. Countries with such a forex policy have to
keep stable monetary policies. However, The Czech Republic, Hungary, Poland and Romania
have opted to set their own seigniorage level (Christiansen & Neuhold 2013). A look at the
seigniorage levels of Poland and Czech Republic between 2004 and 2008 showed that these
countries set their seigniorage levels at relatively low levels showing that they did not rely on the
tool as a revenue source (Bancevicius, 2010).
Conclusion
From the above discussion, it is clear that every decision has two types of effects, positive and
negative. In the case of membership to the EU common market, member countries have had to
sacrifice a significant amount of their sovereignty especially regarding political and economic
decisions. Membership also implies a significant loss of a source of revenue in form of foreign
exchange and seigniorage. On the other hand, membership to the EU has its fair share of
benefits. Most importantly is that there is reduced costs in doing business by eliminating the
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costs and inconveniences of currency exchange. Others include increased FDI activity and more
stabilized economies. The continued presence of the EU and retained membership in the union
by individual members shows that clearly the benefits of the Eurozone outweighs its costs.















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References
Angyal, Z. (2009). Monetary sovereignty and the European economic and monetary union.
European Integration Studies, 7(1), 109-119.
Bancevicius, R. (2010). New EU member states and the Euro: economic readiness, benefits and
costs. Empirica. 38,461480.
Beetsma, R. & Giulodori, M. (2010). The Macroeconomic Costs and Benefits of the EMU and
Other Monetary Unions: An Overview of Recent Research. Journal of Economic
Literature 48, 603641.
Bulr, A. & Hurnk, J. (2009). Inflation convergence in the euro area: just another gimmick?
Journal of Financial Economic Policy. 1(4), 355-369
Christiansen, T. & Neuhold, C. (2013). Informal Politics in the EU. Journal of common market
studies. 51(6),11961206.
Sousa, J. & Lochard, J. (2011). Does the Single Currency Affect Foreign Direct Investment?
Scandinavian Journal of Economics 113(3), 553578.