1. Monetary Union

2. Return of work
WTO
Weak Currency
Articles….

3. Syllabus aims Understand benefits and costs of monetary unions.
For example:
the effects on the rate of inflation;
unemployment;
the Balance of Payments
and economic growth.
Students could focus on the eurozone.

4. What is a Monetary Union?
It’s when at least two countries share the same currency.

5. 5 monetary unions… EMU – Eurozone Central Africa zone
Eastern Caribbean
Overseas Issuing Institute – ex french colonies…
As well as a number of countries who use the currency of another country eg US $ in various countries…

6. Monetary Union
Monetary union
It’s when at least two countries share the same currency.
Having a fixed exchange rate between member countries
A common monetary policy
Mrs Gordon's notes

7. Do you think the UK should join the Euro?
What are the arguments against?
What are the arguments for?
What’s your opinion….?
Do you think the UK should join the Euro?

8. Benefits of Monetary Union
Reduced exchange rates costs
Greater price transparency
More trade with partner countries
Inward investment
Macro economic management
Greater economic integration

9. Problems with Monetary Union
Transition costs
Loss of policy independence
Structural problems (one size fits all!)
Loss of political sovereignty

10. Case for Entry into the Euro
Monetary Union
Case for Entry into the Euro
Mrs Gordon's notes

11. Microeconomic Benefits of Entry
Monetary Union
Microeconomic Benefits of Entry
The Euro is important in realising some of the gains from a functioning single market
(1) Potential Gains for consumers
Lower prices because of increased competition/ greater price transparency (this is more likely with easily transportable goods)
Reduction in the transactions costs of travelling within Europe (e.g. costs of currency exchange)
Easier to live and work in different EU countries
Membership of the Euro should in practice make it easier for consumers and businesses to compare relative prices levels across member nations. This will encouraged increase cross-border trade and increase the competitive pressures across many different markets. There are potential gains in consumer welfare if price transparency leads to improvements in allocative efficiency.
Mrs Gordon's notes

12. Microeconomic Benefits of UK Entry
Monetary Union
Microeconomic Benefits of UK Entry
(2) Potential gains for businesses
Invoicing can be done with one currency
Lower transactions costs – some people argue that staying out of the Euro is equivalent to exporters facing a tariff when they trade inside the EU
Gains for the tourist industry in attracting overseas visitors
Businesses might be able to fund their capital investment at lower real interest rates
The Euro is vital as a complement to the success of the Single European Market. This should lead to an increase in intra-European trade flows and higher inward investment within the EU region. Britain stands to gain from this, particularly if she can maintain low cost and price inflation and raise productivity of British firms operating in competitive European markets.
Mrs Gordon's notes

13. The Case for Staying Outside the Euro Zone
Monetary Union
The Case for Staying Outside the Euro Zone
Mrs Gordon's notes

14. Microeconomic Disadvantages
Monetary Union
Microeconomic Disadvantages
(1) Changeover Costs from joining the Euro:
Costs of changing accounting systems
Menu Costs (vending machines, catalogues, franking machines, postage
Installation of new payments systems
Customer confusion (imperfect information)
(2) Higher prices
Potential loss of consumer welfare if suppliers increase prices when converting from sterling to euro
(3) The vast majority of consumers will continue to buy locally – what matters more is the effectiveness of competition policy in targeting anti-competitive behaviour
Mrs Gordon's notes

15. Macroeconomic Case Against Entry
Monetary Union
Macroeconomic Case Against Entry
(1) Entering the Euro means losing an instrument of policy adjustment
A “one-size fits all” monetary policy may work against a country if their cycle is not convergent with Euro Zone
Retaining the option of making an exchange rate adjustment is useful
(2) Fiscal Policy constraints
The EU Growth and Fiscal Stability Pact
Limits on government borrowing
But now largely ignored – especially with the effects of the credit crunch / fiscal bail-outs etc
Critics of the Euro argue that the new currency does not meet the requirements of an optimal currency area and that structural economic differences between member nations threaten to undermine the success of the project. Other economists believe that the UK can continue to enjoy a sustained period of macroeconomic prosperity outside the Euro Zone whilst still deriving some of the benefits from participation in the single European market.
Mrs Gordon's notes

16. Should UK ditch the £?

17. Research task…. Look at Greece & Germany
Your task…
Research task….
Look at Greece & Germany

18. Inflation
Unemployment
Balance of Payments
Economic growth