Presentation on theme: "MONETARY UNIONS When at least two countries share the same currency."— Presentation transcript:
MONETARY UNIONS When at least two countries share the same currency
THE ADVANTAGES OF MONETARY UNION Transparency Producers and tourists can more easily compare the prices of international goods, services and resources. Lower transaction costs Transaction costs are reduced because there are no commission payments to financial intermediaries. Certainty and investment The Euro creates certainty because firms can predict the cost of imported raw materials and can set the price of their exports, which means they can plan, and are more likely to invest. Trade creation Trade between members of a single currency area is likely to increase because of the benefits of sharing a currency. Job creation Increased trade is likely to generate jobs in those industries that experience increased exports. Low inflation Common inflation targets
THE DISADVANTAGES OF MONETARY UNION Loss of economic sovereignty Once a country become a member of the euro area, National Central Banks, including the Bank of England, lose their ability to use interest rate policy to achieve independent macro-economic objectives. Following the financial crisis and global recession, recession-hit countries like Greece were not able to reduce interest rates unilaterally. Difficulty of conversion Many European countries, including the UK, may never be able to converge fully with the euro area. In the UK in particular, convergence is difficult because of the uniqueness of its housing market and financial services sector, and because of the closeness of the UK's trade cycle to that of the USA. In addition, the UK labour market is highly flexible in comparison with France, Germany, and Spain and this also makes convergence difficult. One cap does not fit all Having only one interest rate is not sensible when dealing with a diverse range of economies and economic circumstances. Even within a single currency area, great diversity can exist, suggesting that a common economic policy might be unproductive. Dealing with asymmetric shocks Asymmetric shocks are external shocks that have an unequal impact on an economy or, in this case, the EU area. The following recent shocks did not have an equal effect across Europe: the handover of Hong Kong to China by the UK in 1997 led to an exodus from Hong Kong to the UK, and not to the rest of Europe, and helped fuel a mini-housing boom in parts of London; the September 11 th 2001 attacks on New York did not affect all Eurozone countries evenly; and the collapse of the Argentinean peso in 2002 mainly affected Spain. In these types of circumstance it is argued that one interest rate will not be appropriate. A region experiencing the negative shock would require lower interest rates in comparison with other regions.
CONDITIONS NECESSARY FOR THE SUCCESS OF A MONETARY UNION Should be free movement of labour Capital mobility Automatic fiscal transfers when individual countries are performing poorly Countries should share the same trade cycle
The European Union (EU) is a collection of 27 European nations that cooperate together on economic and political issues. Define the term free trade means Since 1993, the EU has operated a single European market. This incorporates free trade between EU members but what else… State and explain four benefits of being a member of the EU State and explain three drawbacks of being a member of the EU Explain what the Eurozone is State four reason for joining the euro State three reasons against joining the euro Since 2004, twelve more countries have joined the EU. Explain what effect this expansion has on existing EU member states
THE UK IS A MEMBER OF THE EUROPEAN UNION BUT HAS NOT ADOPTED THE EURO AS ITS CURRENCY. TO WHAT EXTENT DO THE BENEFITS OF MEMBERSHIP OF A MONETARY UNION SUCH AS THE EUROZONE OUTWEIGH THE COSTS? (30) EXAM QUESTION June 11