Leading commentator shave argu
Leading commentator shave argued that the European Debt Crisishas been particularly damaging for the “European Periphery” (e.g.Spain, Italy, Greece) because of their adoption of the Euro (commoncurrency). Briefly sketch out the trade-offs involved in adopting acommon currency. What are the main economic considerations thatweigh on these costs and benefits?
Answer:
Having a common currency has many costs and benefits, thebenefits of having a common currency between nations:
1. When few nations have a common currency together, it makes itdesirable for a third country to do business with these countrieswhich share a common currency. This helps promote business andtrade activites in these countries.
2. This common currency becomes a strong and stable currency inthe world.
3. The choices presented to the consumers increases and thecitizens also enjoy stable prices.
4, There is a strong integration of the financial markets ofthese nations which opens up investment arenas to the investors inthese nations. One added advantage to the investors is that they donot have to bear the risk of exhcnage rate fluctuations as theyshare a common currency. This also reduces transaction costsbetween nations.
The costs of having a common currency:
1. One major cost to the nations sharing a common currency isthat they loose the freedom to frame their monetary policiesindependently. Monetary policy would have to be framed commonly forthe countries together.
2. There is a risk of uneven development as it is seen in theEuro zone. Though they have a common currency, it cannot be seen asa single economy because the nature of business cycles and economyof every nation is different. This means that creating a commonmonetary policy becomes difficult as one monetary policy cannotaddress all the issues of every nation.
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