Euro: To Join Or Not To Join?
Do the benefits of joining the euro outweigh the costs?
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It is hard to enjoy full membership of a single market without also participating in a single curren...
It is hard to enjoy full membership of a single market without also participating in a single currency. One currency highlights price differentials across borders, and will either eliminate these or force companies to justify them to consumers. Already the euro has forced reductions in costs, and even the changeover period saw – in France – few increases in prices.
It is a fallacy to assume that merely showing that prices differ will force unofficial harmonisation. Different market costs, monopolies and cartels (for example in car markets) mean that purchasers are unable or unwilling to enjoy perfectly competitive markets. The changeover period provided opportunities for price rises – Italian newspapers rose by up to 18%, the German nickname for the new currency was the ‘teuro’ – teuer meaning expensive.
Remaining outside the euro disadvantages businesses who are forced to compete with euro-member ones ...
Remaining outside the euro disadvantages businesses who are forced to compete with euro-member ones which have reduced transactions costs of exchange rate fluctuations. The benefits of not having to change money across borders also go to private individuals who at present have to pay banks to deal with switching currencies.
Businesses who trade outside the euro-zone will still have to account for international currency market fluctuations, which they can protect against by hedging or forward currency trading of euros as well. Holidaymakers save little in not changing currency, given the ubiquity of credit cards and travellers cheques today.
The euro will provide a challenge to the supremacy of the dollar, making worldwide investment less d...
The euro will provide a challenge to the supremacy of the dollar, making worldwide investment less dependent on the vagaries of one country’s economy. As the euro will play an increasing role in foreign exchanges, it would be advisable to join in order to have one’s own interests accounted for directly by the European Central Bank. The ECB itself has successfully held down levels of inflation, and proven its independence from EU politicians – which were the two key requirements for future success.
The weakness of the euro in its first two years is a witness to the foreign exchange markets’ distrust of both it and the ECB. The exact exchange rate matters less than the fact that Europe’s markets are over-regulated by governments and have failed to implement structural reforms necessary to attract international investment. Meanwhile, the ECB has a reputation for weak decision-making and secrecy, being unwilling to publish the minutes of its meetings or explain away a series of gaffes.
The economic significance of the euro matches the current trend within the EU of greater harmonisati...
The economic significance of the euro matches the current trend within the EU of greater harmonisation of policymaking in economic and foreign affairs. It is increasingly difficult to be considered a full member of the EU without joining in its most significant venture. Furthermore, as negotiations trade off between different areas of policymaking, non-participants will be excluded from internal debates, as well as being passed over internationally (at the G7 or WTO meetings) in favour of a single voice of ‘Mr Euro’.
The fact that the EU is doing far more than was originally intended (a free trade areas) does not mean that this is universally popular. In fact, there is a risk – particularly in Eastern Europe – of strains from economic inflexibility leading to political anti-EU parties gaining ground. Internationally, speaking as part of the EU may provide countries with a louder voice – but that is useless if they are unable to articulate the best policy for themselves.
Membership of the euro means a single monetary policy for much of Europe, which simplifies borrowing...
Membership of the euro means a single monetary policy for much of Europe, which simplifies borrowing and provides a lower level of interest rates due to greater security. In every currency union, there will always be disparate monetary pressures – independent rather than political regulation is the key requirement.
Monetary inflexibility is extremely dangerous, given that asymmetric shocks will become more likely as the EU expands. The UK has often been closer to the USA’s economic cycle than Europe’s, partly because of its oil revenues and greater transatlantic trade. There is also a risk that older and larger members of the EU will have more policymaking clout than newer or smaller ones. A single interest rate cannot practicably apply to Portugal, Germany and Bulgaria – unlike individual countries, linguistic and cultural barriers make for an inflexible labour market.
Problems with the Growth and Stability Pact do exist, but can be dealt with as a separate issue from...
Problems with the Growth and Stability Pact do exist, but can be dealt with as a separate issue from the euro itself. As more countries join, the legal requirements of the Pact can be applied flexibly, but are at least in place should disputes arise. Countries are protected from governments acting as lender or last resort or over-inflating the money supply.
Monetary inflexibility is worsened by lack of fiscal ability to adapt to economic shocks in one particular country. The Growth and Stability Pact is either applied too rigidly or has been fudged to prevent its use where politically necessary – which undermines the EU as a whole.
Eastern European countries will become more securely tied into the EU as they are required to adopt ...
Eastern European countries will become more securely tied into the EU as they are required to adopt the euro. As many are already doing so informally, it would benefit both parties if they were bound into the structures and protective legal requirements as are all other members. It is true that the ECB would need to undergo radical reform if enlargement takes place – but it might provide a beneficial stimulus to structural renewal.
Enlargement will only cause further problems as countries with less secure economies and more disparate structures also demand a voice in policy making. Each country already puts conflicting strains on the ECB, and neither side will benefit from policies which seek to impose too narrow a straitjacket – particularly as sensitivities to monetary policy vary widely. Swelling the size of the ECB will also worsen decision making.
Staying aloof from the euro will do long term damage to investment into non-member states, as foreig...
Staying aloof from the euro will do long term damage to investment into non-member states, as foreign multinationals will naturally relocate to areas using the euro rather than those who are not sure whether or not to join.
The experience of Britain has disproved this thesis – Britain has maintained high levels of inward investment and financial services despite uncertainty over joining. Similarly, the Dutch have not suffered from their voting against joining, despite gloomy predictions. Advantageous labour laws and skills levels are more important factors in investors’ decisions.
It is the very fact of the irreversibility of the euro that makes it more secure than previous attem...
It is the very fact of the irreversibility of the euro that makes it more secure than previous attempts at single currencies. Countries are too committed to the euro to be able to pull out – and the more members it has, the less prone it become to currency speculation.
Previous attempts at single European currencies have a poor history – the 1970s ‘snake’ and 1990s EMU both suffered from speculators. However, the euro is more dangerous to join as it would be virtually impossible to withdraw from once entered into – and economic convergence is only ever short term.
What do you think?