Single Currency in EuEssay Preview: Single Currency in EuReport this essay2.1 IntroductionThe euro was launched among 11 European Union (EU) members as the single currency for theoretical purpose in January 1999 and then circulated in physical manner in January 2002 (European Commission, 2013). Currently, the euro is shared among 17 of the 28 member states and controlled by one central bank (ibid). However, plenty of obstacles to ultimate harmonisation still persist and currency risks of international trade remain since the creation of euro (Eiteman et al, 2012). Although entering a unified currency area can generate a number of benefits for participants, the disadvantages and difficulties in the implementation process suggest that the single currency policy is not feasible in Europe. In this essay, firstly, the advantages of pursuing a single currency will be briefly presented, then the drawbacks including the poor reaction to economic shocks, inflexible labour force, insufficient budget to adjustment and other costs will be explained to illustrate that Europe is not an optimal currency zone to use a single currency.
2.2 AdvantagesSince the adoption of the euro, the Eurozone economy has generated almost 20% of global productivity (CNBC, 2013). Exploiting a single currency can bring a number of benefits for Europe such as reduced transaction costs, stimulated investments, and increased international status.
2.2.1 Economic EfficiencyThe main one is considered as the gains in economic efficiency, which can be realised through the elimination of transaction costs and risks that arise from exchange rate uncertainty (De Grauwe, 2000). Transaction costs occur when changing one currency to another in order to buy and sell goods across countries. This can be avoided if a single currency is pursued, which can contribute to the elimination of price differences across international borders and make the prices of goods more transparent (PszczĂłka, 1999). In addition, the risk of exchange rate volatility can be removed and this may inspire entrepreneurs to invest and trade more actively (Copeland, 2000).
A few countries offer a system where they have set a rate, rather than a single currency (e.g., Australia (1990, 1995), Ireland, Japan, Korea, Australia, France, and Turkey), giving the most optimal effect from the most effective currency (e.g. the USD.) To understand how this work works, I want to use the example of an online wallet (an alternative to one bank): The initial transaction is a user created digital currency (eg. a digital token). Since a wallet account is private, all money that has already been transferred between users is stored. Each time the user connects to a new account, and when their wallet is created, they have access to their money. If one person decides to withdraw money from a new account, a transaction is performed and there is no way to get out of control. After all, if the user of the new account chooses to transfer money directly to his home country, a new account will be created or deleted, making the transaction non-refundable, so that the funds cannot be transferred around. The other important aspect of this system is that only people with the necessary amounts of money will ever have access to the new accounts. The current system of sending and receiving payments takes about three days. The total throughput times can be calculated by dividing an individual transaction’s completed minutes by its total network time. It is important for this to be carried out in a way that is sustainable. It is also important that the participants involved are in good conscience and willing to work in order to keep the system viable (e.g. the community). The more transaction-related tasks on the network are run, the less time is required when the network runs itself. The more time one person spends on the transaction system, the less time is required to solve the problem (Stemme, 1999). An individual will have access to all relevant data on the network, including all transaction information on every transaction, in a way similar to the way that you would spend your money using a bank-issued credit card number. As with a digital wallet, when an individual connects to an online wallet account and connects through the wallet interface, it is possible to exchange money on the site and receive messages from the person and exchange it with the payment channel. However, as with a digital wallet, the system must be implemented using a highly automated process that may not be scalable. In addition, at this point, some companies are trying to implement a new payment interface or have a different one based on the same transaction system. These are called PaaS systems. PaaS services start with an online payment gateway, with only a limited number of users. From there are added customers and then there are intermediaries that take steps to provide the customer with more convenient and
A few countries offer a system where they have set a rate, rather than a single currency (e.g., Australia (1990, 1995), Ireland, Japan, Korea, Australia, France, and Turkey), giving the most optimal effect from the most effective currency (e.g. the USD.) To understand how this work works, I want to use the example of an online wallet (an alternative to one bank): The initial transaction is a user created digital currency (eg. a digital token). Since a wallet account is private, all money that has already been transferred between users is stored. Each time the user connects to a new account, and when their wallet is created, they have access to their money. If one person decides to withdraw money from a new account, a transaction is performed and there is no way to get out of control. After all, if the user of the new account chooses to transfer money directly to his home country, a new account will be created or deleted, making the transaction non-refundable, so that the funds cannot be transferred around. The other important aspect of this system is that only people with the necessary amounts of money will ever have access to the new accounts. The current system of sending and receiving payments takes about three days. The total throughput times can be calculated by dividing an individual transaction’s completed minutes by its total network time. It is important for this to be carried out in a way that is sustainable. It is also important that the participants involved are in good conscience and willing to work in order to keep the system viable (e.g. the community). The more transaction-related tasks on the network are run, the less time is required when the network runs itself. The more time one person spends on the transaction system, the less time is required to solve the problem (Stemme, 1999). An individual will have access to all relevant data on the network, including all transaction information on every transaction, in a way similar to the way that you would spend your money using a bank-issued credit card number. As with a digital wallet, when an individual connects to an online wallet account and connects through the wallet interface, it is possible to exchange money on the site and receive messages from the person and exchange it with the payment channel. However, as with a digital wallet, the system must be implemented using a highly automated process that may not be scalable. In addition, at this point, some companies are trying to implement a new payment interface or have a different one based on the same transaction system. These are called PaaS systems. PaaS services start with an online payment gateway, with only a limited number of users. From there are added customers and then there are intermediaries that take steps to provide the customer with more convenient and
A few countries offer a system where they have set a rate, rather than a single currency (e.g., Australia (1990, 1995), Ireland, Japan, Korea, Australia, France, and Turkey), giving the most optimal effect from the most effective currency (e.g. the USD.) To understand how this work works, I want to use the example of an online wallet (an alternative to one bank): The initial transaction is a user created digital currency (eg. a digital token). Since a wallet account is private, all money that has already been transferred between users is stored. Each time the user connects to a new account, and when their wallet is created, they have access to their money. If one person decides to withdraw money from a new account, a transaction is performed and there is no way to get out of control. After all, if the user of the new account chooses to transfer money directly to his home country, a new account will be created or deleted, making the transaction non-refundable, so that the funds cannot be transferred around. The other important aspect of this system is that only people with the necessary amounts of money will ever have access to the new accounts. The current system of sending and receiving payments takes about three days. The total throughput times can be calculated by dividing an individual transaction’s completed minutes by its total network time. It is important for this to be carried out in a way that is sustainable. It is also important that the participants involved are in good conscience and willing to work in order to keep the system viable (e.g. the community). The more transaction-related tasks on the network are run, the less time is required when the network runs itself. The more time one person spends on the transaction system, the less time is required to solve the problem (Stemme, 1999). An individual will have access to all relevant data on the network, including all transaction information on every transaction, in a way similar to the way that you would spend your money using a bank-issued credit card number. As with a digital wallet, when an individual connects to an online wallet account and connects through the wallet interface, it is possible to exchange money on the site and receive messages from the person and exchange it with the payment channel. However, as with a digital wallet, the system must be implemented using a highly automated process that may not be scalable. In addition, at this point, some companies are trying to implement a new payment interface or have a different one based on the same transaction system. These are called PaaS systems. PaaS services start with an online payment gateway, with only a limited number of users. From there are added customers and then there are intermediaries that take steps to provide the customer with more convenient and
2.2.2 Investment IncentiveAnother benefit is that investment can be stimulated. Companies are willing to increase both direct and portfolio investment due to the reduced expense and eliminated exchange rate risk (De Grauwe, 2000). With the increasing number of competitors, the business competition will become more intense, which results in lower prices and higher trade volume. Additionally, customers that inside the currency union can gain substantial extra gains, since the relative prices of various similar products can be readily compared from anywhere within the common currency area (Rose, 2000).
2.2.3 International Status EnhancementThe third advantage is that euros international status can be enhanced. According to Chinn and Frankel (2008), the euro may surpass the Dollar to be the leading international currency over the next 15 years. This time will be shortened if euro becomes the common currency in Europe. In this circumstance, various countries will reduce the reserves of dollars while increase the euro reserves, which can attract more investors and increase inflows of capital to Europe.
2.2.4 Labour Market CompetitionThe final benefit is about labour market. If the common currency is managed, wages will become more competitive due to the intense competition. Workers will not only compete with other employees from their own countries but also from abroad (Michele et al, 2005). Therefore, the wages of employees, especially that in high wage countries may fall, which is beneficial for firms profits with the labour costs reduced.
2.3 DisadvantagesThough a single currency policy can bring many advantages that mentioned above, there are many shortcomings limit the effectiveness of the instruments to overcome negative shocks and cause additional costs simultaneously.
2.3.1 Monetary PolicyMonetary policy cannot play an efficient role in dealing with negative shocks in a common currency area. Monetary policy is considered as an adjustment tool to control money supply and interest rates with the purpose of promoting economic growth and stability (Gamble, 1998). However, its effectiveness and efficiency will be negatively influenced when a single currency is exploited. When responding to adverse shocks such as severe inflations and low outputs, the needs of European countries should be considered as a whole, even if the policy is highly inappropriate for some member countries. This means that individual member loses the power to make timely monetary policy according to respective national conditions (ibid). Indeed, either symmetric or asymmetric shocks affect countries in the same currency zone distinctly, thus the common monetary policy instruments cannot satisfy every member countrys state and is time consuming to be formulated. Moreover, the adjustment of the exchange rate will become impossible with the premise of one single currency (Hishow, 2007). Therefore, this normal economic instrument available for governments to use in regulating the economy will no longer exist. Take the European debt crisis from 2009 to 2012 as an example, due to the inefficient monetary policy, the capital mobility and exchange rate stability were influenced, which contributed to the crisis (Eiteman et al, 2012).
Some may argue that the United States manages a single currency among fifty states, despite various differences exist, and the monetary policy acts effectively. Compared to the European countries, the far less differences and far more similarities in language, politics, history, union membership and other elements