When the European Union was created in 1957, the member states focused on creating a common market for trade. Nevertheless, over a period, it emerged clear that closer monetary and economic cooperation was necessary for the internal market to flourish and develop (Leblond 67). Closer economic and monetary cooperation was also meant to effect greater economic prosperity of Europe. One of the steps towards establishing economic and monetary cooperation was the creation of a single or common currency. At the onset of 1999, the euro, which was the common currency, was put into circulation as a single currency for the 11 nations out of the 15 EU member countries. Greece started using the euro in 2001 (Salvatore 56). Regardless of the euro going into circulation in 1999, the ideas behind its introduction were developing since the early 1990s. In 1991, the EU member states endorsed a Treaty on European Union. The states decided that the Europe would introduce a strong and stable currency for the forthcoming 21st century. The ratification of the treaty signaled the creation of the European Monetary Union (EMU). The job of the European Monetary Union was to guarantee the stability of the price of the common currency (Salvatore 67). This implied that EMU ensured that the yearly rate of inflation was not more than 2 per cent for the entire Europe. The motive to use a single currency for members of EMU had both negative and positive consequences (Salvatore 78). In this regard, this paper debates on whether the euro should be abandoned, and each state adopts its own currency.
The first significance of using the euro is associated to the elimination of the need to exchange currencies between member states of European Union (Vujic 67). The adoption of the euro meant that member states were to save as much as 30 billion US dollars yearly. Initially, this savings were extremely large because of reduction in the costs of transactions linked to the exchange of currency by companies that export and import currency from various nations. Besides the eliminations of the need to exchange currencies, the difficulties of rate of exchange volatility are also a thing of the past (Salvatore 54). The elimination of the exchange rate volatility only left the fluctuations between the dollar, yen, euro and other significant national currencies outside EMU. The fluctuations of exchange rate are also another cost of transaction. This is because it makes the trading between companies from different nations more risky. For instance, the exchange rate volatility can pose significant problems in the trade if a manufacturer and importer are from different countries (Salvatore 81). If the value of one currency falls in relation to another, the manufacturer or the exporter might end up selling his products far less than he should have. On the other hand, the importer can also pay more than was initially agreed upon. The elimination of this risk had helped international within EMU and gives advantages to all of them.
The use of common currency, especially the euro, deals with the prevention of competitive speculation and devaluations. According to Leblond (45), a competitive devaluation is refers to a circumstance in which one nations devalues its currency in order to improve exportation. In reaction, the importing countries, or the trading partners to a country that has devalued its currency, also devalues its currency. This results in downward spiral concerning the value of the currency. In addition, it also results in increase in the rate of inflations (Salvatore 56). Because EMU’s goal is to ensure that the rates of inflation are low, the move to use a common currency makes sense. With regard to speculation, a common currency for the EMU members eliminates speculation between the countries. Abandoning the use of euro will allow the reoccurrence of speculation. According to Salvatore (41), speculation happened frequently in Europe because whenever individuals perceived that a currency’s value was going to drop, they would sell all their holdings in that form of currency. Other people would follow resulting in a self-matriculating trend. As a way of controlling speculation, European countries had to keep the rates of interest high. According to Leblond (31), high rates of interest deter economies, which was the consequence in Europe in the early 1990s. Because the use of Euro allows eliminates speculation, the economies member states grow much more easily than when unnaturally high rates of interest were needed to ward off speculation (Leblond 67).
Besides eliminating speculation and the risk of competitive devaluation, the use of euro currency eliminates the need to convert form one national currency to another (Salvatore 76). The problem is is that costs come along with benefits. The biggest cost of switching to the use of euro was that every member state surrendered its right to change the economic and monetary policies in order to react to economic issues at home. Along this line, the rates of exchange between nations were no longer modified by the respective countries in order to assist regional slumps to move. This appears to be a significant cost on the surface. However, when assessed closely, the idea of relinquishing monetary policies is not a big step for majority of the member countries of European Monetary Union (Salvatore 44). Because the creation of the European Monetary Union, many member nations have already done away with all the trade barriers. This makes it extremely easy to buy and sell all commodities across national borders. According to Leblond (67), it has also made it extremely easy to borrow and lend. This implies that European Monetary Union countries are already unified together in a semi-unitary monetary policy.
The use of euro as a common currency throughout Europe should not be abandoned because it ensures that businesses do not pay hedging costs in order to safeguard themselves from the risk of currency fluctuations (Salvatore 67). Businesses taking commercial transactions in different nations do not have incur administrative costs of accounting for the dynamics of changes. Such businesses will also not account for the time involved accounting for the changes in currencies. It is approximated that the cost of currency of export to small business or firms is about 10 times the cost to the multi-national company, who offset sales against purchases and can control the best rates.
Salvatore (54) cited that a common currency results in lower rates of interest. This is because all EMU member nations would be locking into the credibility of German monetary. The stability pact, which is the major points that were agreed upon at the Dublin summit in 1996, forces EMU members states to improve the credibility of euro internationally. This results in more investment, jobs and lower mortgages (Salvatore 89).
According to Salvatore (34), the euro cannot be abandoned because there are different ways of dealing with economic issues in respective nations. Despite a nation relinquishing its right to change monetary policy, it retains the entitlement to modify its fiscal policies. This implies that European Monetary Union will be capable of changing how much they tax individuals. Leblond (67) pointed out that if one member country of EMU is having a economic issues, then other nations can raise their taxes in order to improve the buying power form those nations. The additional money can be utilized in helping bail out the nation that is experiencing economic or financial problems. There has also been an issue concerning the increase in the budget of Economic Monetary Union (Leblond 65). As such, the nations are also capable of helping countries within the union, which experience economic problems in the future.
The major problem focused on by opponents of common currency such as euro is that one nation might be in recession, and lack the choice. That nation will have to wait for the recession to end. According to Leblond (65), this is because the changing monetary policy of the entire EU would affect more nations than it would assist. However, the theory is that by using a single currency such as the euro throughout Europe, the economies will be unified together, and the cycles of business will eventually be unified. Salvatore (65) pointed out that if the business cycles of all European nations would be coordinated, and then there would be risk of one nation being in recession, while the rest are stable economically (Leblond 78).
Another drawback of using the euro as a single currency throughout Europe is that the reforms of the labor market have to be made in order to get rid of the of downward wage stickiness. According to Leblond (54), the major reason for those reforms was that the changes in the rates of wages were second of the two ways, which respective nations are able to change their fiscal policies. Salvatore (89) cited that wages are not normally prone to move downwards. Stipulations are required in order for people to make the possibility of wage cuts available to the governments of member countries. In the case of European Monetary Union, the requirement was that the governments of member nations had few other ways of controlling their economy. If employees are reluctant to accept a wage cut, then many of them might end up quitting their job. This is because the economy would worsen if the government does not have control over it. There is no apparent outline for the reforms in the labor market, though one of the major ideas is to raise the ease of employees’ incorporation (Leblond 45). Employee incorporation or worker integration implies that firms need to make simple for their employees from other nations to work outside of the mother country. The incapability of employees to move from one nation to another is usually dependent on barriers of language. As a result, this was the first issue to be dealt with.
According to Salvatore (67), the euro should be brought down because EMU member countries have widely varying economic performances and different languages. According to Salvatore (56), countries speaking different languages have never attempted to form a monetary system. The dollar might be working in the United States because the labor market is mobile. In addition, the success of the dollar as a common currency is facilitated by the fact that the people there speak common language across an extremely large area. In Europe, language is a major barrier to the mobility of labor force (Leblond 67). This might result in pockets of depressed areas in which people cannot find job. On the other hand, it might also result in pockets of areas with flourishing economies and high wage rates. Despite the cohesion funds attempting to address this issue, there are huge differences across the economic performance of European Union.
The euro should be abolished because the member countries of European Union have different cycles. According to Salvatore (67), the United Kingdom seems to be growing sensibly faster than other member countries. German seems to be having problems. This is in contrary to the position in the 1990. The United Kingdom has seemed to have an economic cycle that closely resembles that of the US. The UK has changed because the rates of interest are set in every nation at the appropriate level for it. In this regard, Salvatore (89) pointed out that one central bank cannot set inflation at the suitable level for every member state.
The loss of national sovereignty is the most frequently cited disadvantage of a common currency (Salvatore 54). The transfer of fiscal and money competencies from the national level to community would imply that economically stable nations would have to cooperate, especially in the field of economic policy, with other weaker nations that are tolerant to higher inflation.
Regardless of the many problems that arise from the adoption of euro as a common currency in Europe, it is apparent that the European Union is considering these problems (Salvatore 11). Indeed, the EU began considering these problems even before the institution of the euro as a single currency in Europe. The measures pu in place by the European Monetary Union in order to avert the problems that might arise from the use of euro indicated that union was well-prepared to stick with the euro. This form of action caused many other nations around Europe to apply for the membership into EMU. An example of such nations is Croatia (Salvatore 67). The idea that other nations close to Europe are more than willing to join the system indicates that there is not much fear of the disadvantages related to the use of euro across Europe. In this regard, Leblond (78) mentioned that if nations from outside European Monetary Union are not shying away from joining the bandwagon, then it implies that there is perhaps not much uncertainty on the inside either.
The negatives and positives of the using the euro as a common currency in Europe are evident. The European Monetary Union stuck to their plan of adopting the euro in 1999. This indicated that they evidently thought that the positives outweighed the negatives. The approval to put the euro into circulation was not only approved by the members of EU, but also other nations such as Croatia. The approval of the euro by these nations showed that there was an optimistic attitude concerning the adoption of the euro (Leblond 78). An optimistic attitude concerning any currency is one of the pivotal factors in influencing its success. Every time people lose confidence in a currency, the currency did not survive a major inflation, a major recession followed, or hyperinflation occurred. The confidence in the euro augurs well for its success in future.
The ratification of the treaty signaled the creation of the European Monetary Union. The motive to use a single currency for members of EMU had both negative and positive consequences. The first significance of using the euro is associated to the elimination of the need to exchange currencies between member states of European Union. The euro cannot be abandoned because there are different ways of dealing with economic issues in respective nations. The use of common currency, especially the euro, deals with the prevention of competitive speculation and devaluations. The major problem focused on by opponents of common currency such as euro is that one nation might be in recession, and lack the choice. The loss of national sovereignty is the most frequently cited disadvantage of a common currency. Regardless of the many problems that arise from the adoption of euro as a common currency in Europe, it is apparent that the European Union is considering these problems.