Single Currency

02 Dec 2010 3 Comments

by 11kimji in Economics, Section 4

Single currency is when a number of countries join their currencies together into one single currency. For example, Euro of European Union is a single currency.

Pros:

1. A single currency removes the cost that is required for converting from one country’s to another currency. This benefits individuals or firms that travel or trade a lot among the member states of EU.
2. It’s easy to compare the price when a single currency used, because there’s no need to convert each time you compare the prices of goods in different countries. Therefore, this increased price transparency helps firms to cut costs, as they can find the cheapest goods or services more easily.
3. Asingle currency should encourage greater competition as there is greater transparency in prices. This helps increase efficiency as firms are forced to remain competitive.
4. The Euro is one of the most significant world currencies, as there are over 300 million consumers. Both these things add up to the possibility of increased inward investment from the rest of the world into Europe.
5. When a single currency is used, one can eliminate concerns about exchange rate uncertainty, at least within the single currency zone. Thus, one doesn’t have problems with knowing whether the exchange rate will rise or drop. Hence, the trading within the zone is encouraged with the use of single currency.

Cons:

1. Having a single currency means that there is a single monetary policy, which sets interest rates for all Euro countries. That is, the monetary policy will be applied all the Euro countries, so any monetary policy will be set to benefit more countries, regardless of the consequences in one country that might be damaged by that monetary policy.
2. Even when countries are closely in line, it may be possible that a single policy will have different effects on different countries. For example, a much larger proportion of people own their own house in the UK than many other European countries. This makes the UK much more reliant on mortgage lending. A change in interest rates then, may have a different effect on the UK from other countries.
3. Single currency is bad for recovering from the external economic shocks, such as a rapid rise in oil prices, which may have an adverse impact, depending on how much a country depends on the scarce resources.
4. Transition costs are very high because all of the already issued money have to be destroyed or remade into a new currency (single currency). New money has to be issued and the old withdrawn, vending machines have to be adapted to take the new coins,and foreign exchange departments may shrink in size in some financial institutions.

According to the article about the situation in Spain, Spain is on the edge of debt crisis after introducing a single currency, followed by experiencing prosperity. Although the problems Spain had primarily were better than the problems in Greece or Ireland, the actual crisis was developing under the surface. While there was a boom in the Euro countries, the prices and wages increased more rapidly in Spain in the attempt to cover up for the large trade deficit. However, after the bubbles created over the boom were eliminated, Spain was left with incredible costs, which made Spain even weaker than before the boom. It’s hard for them to become competitive in the world trade again because they are using a single currency. If Spain had had its own currency, peso, it could have intervene in the exchange rate to become competitive again. So, in the case of Spain, it seems like it was sweet and dreamy when the Euro was first introduced, but later, they realized that it’s more bitter and sour to have a single currency.

 

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