?The debate is polarized to an extraordinary degree. For many who oppose the single currency, it is not merely an ill-advised undertaking, but a disastrous one: a stride further along the road to a European superstate that will submerge the individuality of the European nations in an unwieldy federation, hobbled by bureaucracy, commanding little popular support and imposing a crippling burden of regulatory and other costs on Europe’s economies. Opponents also see it as a distraction from the two most urgent tasks currently facing the EU: completion of the single market and enlargement of the Union to the east. Many argue that EMU will prove unworkable and divide Europe dangerously into “ins” and “outs”. Many advocates of EMU reply in kind. They see not only a chance to achieve worthwhile economic benefits, but also a fleeting opportunity to grasp an historic prize. They regard EMU as essential to creating a stronger EU, with greater economic, political and social cohesion. This offers the best hope for helping the former communist-bloc countries: closer integration among the current EU members helps, not hinders the prospects for enlargement. Without the single currency, they say, the reality of the single market will not be achieved and Europe’s economies will remain divided and weak, unable to compete internationally either with the low-wage economies of Asia or with the large, integrated, high-wage economy of the USA. Only a stronger and more integrated Europe will be able to exercise leadership on the global issues facing the world economy (Currie).
Emerson points out in his book, The ECU Report, some of the benefits of EMU. One of the most obvious benefits is the resulting ease of transactions across the EU. This will save both money and time. The savings in transaction costs would be approximately fifteen billion ECU per year , or .4 percent of GDP. Most of these gains are financial and consist of the disappearance of bank commissions and of the exchange margin by which a bank sells a currency more expensively than it purchases it. Many also believe that the suppression of exchange rate variability in terms of increased trade and movement of capital will do much to lessen foreign exchange risk. A potentially very important gain arises because EMU reduces the overall uncertainty which investors feel about economic prospects, particularly foreign investors faced not only with the inherent risk of a particular project but also with the risk that an exchange rate change may wipe out the value of future profits. A reduction in overall uncertainty could lower the risk premiums firms have to pay to raise equity capital and would greatly increase investment. Even a small reduction in the risk premium could raise the income of the community significantly. By improving business expectations of future growth and profits, EMU could lead the community not just to a rise in income, but to a higher annual growth path. This would also cut unemployment substantially (pg. 33).
Currie discusses in his article the advantages of low inflation that monetary union will bring.
?For many proponents of EMU, the most important economic advantage is the prospect that the independent European Central Bank (ECB) will deliver durably low inflation for the EMU area. For Germany, which has enjoyed low inflation for decades, the ECB can scarcely offer more on this front than the status quo. These reservations probably apply also to those countries, such as Austria, France and the Netherlands, that have attached their currency to the D-mark and hence adopted the Bundesbank as their de facto central bank. For them, however, the creation of the ECB offers a voice in the conduct of monetary policy, which they currently lack. The disinflation benefits will plainly be greatest for EMU countries that have not enjoyed stable low inflation hitherto. These include Ireland and the UK (were it to join) together with Italy, Portugal and Spain. Low inflation implies low interest rates, as the premiums for inflation and exchange-rate risk would be eliminated from interest rates. Despite the independence of the Bank of England, the UK still faces a premium of more than 1% on long-term borrowing rates compared to Germany and France. Three factors could, however, make the ECB’s performance somewhat more erratic than the Bundesbank’s. First, governors of central banks from all participating countries will influence the ECB’s decisions on interest rates. Although the Maastricht Treaty safeguards the ECB’s independence, it is legitimate to ask at what level of pressure their political resolve might buckle, for example if unemployment remained very high. Second, unlike the Bundesbank, the ECB has a reputation to establish, and to start with a period of higher interest rates may be needed to demonstrate anti-inflation resolve. This in turn could reinforce internal dissent in the ECB. Third, EMU will be a profound economic change, which may well alter the workings of the joint monetary economy in significant and unpredictable ways. All central banks have to cope with such changes from time to time: examples include the shift in UK demand for money after financial markets were liberalized in the 1980s. At such times, policymakers can lose their bearings, and the conduct of monetary policy can become volatile. The ECB will enjoy the monetary equivalent of a baptism of fire. On balance, it seems likely that the ECB will be able to establish a record and reputation for conducting monetary policy in a sound manner. But this may take time, and in the meantime Euro monetary policy, and the markets’ judgement of it, may prove erratic. These problems could be particularly acute if EMU starts on weak foundations, with insufficient convergence. . German exporters will no longer be at a disadvantage vis-?-vis their European competitors in the European internal market and in the markets of non-EU states as a result of devaluation of their competitors’ currencies. Companies will have a reliable basis on which to plan; tourists will not have to exchange currency, which means their holidays will be cheaper; the European currency can become a more important world reserve currency than is presently t he case; and competition intensified by greater transparency in prices will improve the efficiency of the European economies. This will make it possible to safeguard present jobs and create new ones (Currie).?
Despite all of these benefits, there are still concerns about EMU. For one there is a huge cost involved in switching to a single currency. For one, new money has to be made. Adjustments will have to be made to all the different types of money machine such as ATMs, soda machines, and subways. It is estimated that these costs alone will total over five billion. Other major roadblocks are the major cultural differences and the extreme sense of nationalism that each country has There are huge differences in labor market institutions within Europe. There is a language barrier between almost every country in the union. There are differences in opinion in regard to policies, laws, government, and regulations. It will be interesting to see if all the countries of EC can work together for the mutual benefit of the community. There also may be discrimination occur between the countries of EU and non-EU countries. Currie describes in his article how ?the “ins” could discriminate against the “outs” by exploiting loopholes in existing single market directives, devising forms of market opening in new, currently closed areas (for example, European gas and electricity markets), or, in the financial area, by claiming that the interests of EMU monetary policy are paramount. (This last is a tactic that the likely participants in EMU have already used over access to Target, the financial settlement system for Euros.) Or they may simply fail to represent the interests of the “outs” as strongly and negotiations often arrive at a balancing of national interests. Finally they may simply flout the rules: by the time that companies or governments have been to the European court, commercial damage may already have been done (Currie).?
Currie surmises:
?With the right policies, Europe could become an economic powerhouse. Without them, it will continue to decline and lose out to other parts of the world, notably Asia. Moreover, the EU must also face the need to open to the eastern part of Europe, to avoid the political and social unrest that will otherwise result. Getting these policies right will not be easy. If EMU proceeds, the lack of exchange-rate flexibility will mean that regional unemployment and industrial balance will emerge as even more important policy issues than hitherto. The future of the EU will depend on its capacity to address these fundamental issues. Much will depend on whether there are European leaders in the next decade with the right strategic vision for Europe and the capacity to realize it. But that requires a vigorous and informed public debate so that these crucial issues are at the forefront of European politics. Europe faces momentous developments over the next few years and in the first decade of the next century. EMU is a risky venture: ensuring that it works well will be fundamental to the future prosperity of the region and the well being of its people (Currie).?
The Euro, for better or worse, will become a reality and irreversible truth by July of 2002. Thirteen billion banknotes are in production in denominations of 5, 10, 20, 50, 100, 200, and 500. Euro coins will be produced in denominations of .01, .02, .05, .10, .20, .50, 1,and 2. Their initial amount will total seventy billion. It has been a long road for monetary union in Europe, but the everlasting benefits that union could produce for the people may be well worth the wait. One will just have to wait and see.
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