European Monetary Union

European Monetary Union 1 Introduction The European Economic and Monetary Union (EMU) is perceived “as one of the most important developments in recent European integration” (Hosli, 2011). It is considered as a huge step forward for the European Union’s member countries as they had “to sacrifice the macroeconomic control of their national economies” in order to reach common inflation goals (Pilbeam, 2013). As outlined by Popescu et al., (2017) with the economic advance of the Euro Zone, a superior economic stability among their members was required which led to an adoption of a single currency called the euro. Currently, it is adopted by 19 out of 28 EU member countries with the exception of Denmark and United Kingdom which have kept their own currencies after becoming members of the Union. As an stated economic by Pilbeam and monetary (2013), union there between are two two or main more aspects countries – “to an exchange rate union and complete capital market integration”. According to the first component the “countries agree to the permanent fixing of their exchange rates with no margin of fluctuation.” (Pilbeam, 2013). In addition, he notes that the second component reveals that there will not be any impediments “to the free movement of financial capital between the members of the Union”. Klein (1998) asserts that during the process leading up to the European Monetary Union, the support from the EU leaders were substantially strong. However, such level of support was not present among the European countries’ citizens. In this respect, he notes that the negative views derive from concerns about political implications of the retreat of national 2 sovereignty and also the costs for the economy of a common currency. Yet, according to Klein (1998), the hope is that a common currency will bring together the European countries and contribute to a closer integration in regards to security and regulation. Benefits of Economic and Monetary Union As stated by Pilbeam (2013), the benefits related with establishing a single European currency is “a mixture of political, social and economic aspects”. First and foremost, the author suggests that the removal of trade barriers will result in an increase in the economic welfare of the member countries. In addition, a huge part of the European economies’ trade is with each other and they are open to an “international trade as a percentage of their gross domestic product” (Pilbeam, 2013). Respectively, Rose (2000) cited in Pilbeam (2013) estimated that the consequences of a monetary union could lead to a rise in trade by 300% in the countries which the union is applied in, compared to the trade in those without a common currency. Furthermore, another advantage of this trade is the elimination of transaction costs which are concerned when converting different currencies. An estimation from the European Commission states that the savings from the removal of the trade costs to be around 0.4% of the European Gross Domestic Product per annum. As highlighted by Stankovic (2013), this completely removes the need for currency conversion. Therefore, the trading between Union members will be much more facilitated and profitable. In this respect, a significant privilege is the elimination of exchange rate risk which directly leads to reinforcing the internal market and decrease in investment risk. Moving further, another crucial benefit is the removal of capital controls among the EU countries which undoubtedly leads to a more effective allocation of capital within the Union. Moreover, Pilbeam (2013) reveals a great benefit of having a single currency and that 3 is the fact that businesses and consumers will receive an advantage from transparency in prices. This, in turn will lead to price homogenization in the EU (Stankovic, 2013). Costs of The Economic and Monetary Union Quite on the contrary, Klein (1998) reveals that there are a few drawbacks of this Monetary Union the main of which proves to be the inability of its members to set their independent monetary policy. This, in turn, will lead to a high unemployment rates across Europe. “Some countries prefer to have low inflation rates and are prepared to accept relatively high unemployment, while others prefer low unemployment and relatively high inflation” (Pilbeam, 2013, p.420). Additionally, Emerson (1992, p.54) suggests that we will witness a decrease in the microeconomic efficiency “due to a complete segmentation of capital markets”. The member countries should decrease their inflation rates and in accordance with the low European percentage. The decreased EMU inflation rate assumes lower inflation tax for countries with high inflation, which means that their governments will have to substitute “the lost inflation tax with explicit direct and indirect taxes” (Pilbeam, 2013, p. 421). As highlighted by Manasse et al (2014) cited in Gyoerk (2017, p.898), we will also observe significant costs in terms of suppressed labour performance which could result in an adjustment in the price levels “in the absence of currency devaluation within the monetary union.” Furthermore, Pilbeam (2013) states that a fixed exchange rate in the EMU countries will take away the exchange rate policy instrument and monetary policy instruments. 4 Last but not least, he points out that the transition costs have to be taken into consideration. For instance, the printing of new notes, education and training, the costs in regards to a change in the technology systems etc. According to the European Banking Federation (1995), it is estimated that these transition costs would add up to between 25-40 billion euros, against which certain future profits should be applied. Conclusion Overall, the creation of the European Monetary Union is of fundamental importance. This is because of the fact that it integrates a huge amount of countries which benefit in a certain way by joining the Union (Stankovic, 2013). As discussed by Klein (1998), it could help towards strengthening European economies by price transparency, decrease in transaction costs and promoting good economic policies. What is more, the Union brings “internal efficiency and robustness to the EU economy as a whole and to the economies of the individual member states” (Redfern, 2017, p. 112). He also adds on that this gives great stability in the economy, increased growth and higher employment which will profit the European citizens directly. On the other side, Klein (1998) argues that the EMU introduces certain risks for Europe as it inflicts a single Monetary policy on all its members without the safety of fiscal transfers and labour mobility which exist in the United States for instance. Finally, as summarized by Pilbeam (2013, p.422) the pros and cons of the EMU “depends partly on the conversion rates of their currency against the euro” and is relative to a certain extent. 5