of the EMU, and who will lose:
and businesses will face a one-off start-up cost in making the switch to
the euro from their national currency (e.g. changes in accounting procedures,
changes to computer software, etc.)
agents and banks will lose commission on currency exchanges
traders specializing in European currencies will no longer have this business
of the EMU, and who will win:
and consumers who no longer have to pay commission for changing currencies
when visiting more than one EMU country
and consumers who no longer have to spend time making price comparisons
across EMU countries, or shopping for the best exchange rates
in the Member States, in particular those which are small or medium sized,
will no longer confront high transaction costs if they do business in other
Economics of Monetary Union
governments will lose the use of monetary policy. In other words, governments
will cease to have recourse to either exchange rates or interest rates
to facilitate national economic adjustment
fiscal policy will be the only macro-economic instrument available to governments.
However, this will only constitute a problem if the different EMU Member
States grow at different rates or experience asymmetric shocks
of exchange risk will reduce and should eventually all but eliminate the
relative price variability of goods, services, and labor amongst the Member
States of the EMU. The reduction of relative price variability should encourage
intra-EMU trade, foster further integration of markets for goods and services,
and promote economic efficiency within Euroland.
the relative size and wealth of the combined economies of the EMU Member
States, the euro should prove to be a relatively stable currency. The stability
of the euro should in turn serve to stimulate trade between Euroland and
the rest of the world.
of the euro should also increase financial integration within Euroland.
In other words, real interest rate differentials should equalize across
Euroland. The current failure of capital to flow from countries where real
interest rates are relatively low to those where they are relatively high
(due to exchange risk premia, covered interest differentials, or expected
real depreciation) should be eliminated or significantly diminished.
II. EMU