I. The Basics

Costs of the EMU, and who will lose:

• Firms 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.)

• Travel agents and banks will lose commission on currency exchanges

• Currency traders specializing in European currencies will no longer have this business

Benefits of the EMU, and who will win:

• Tourists and consumers who no longer have to pay commission for changing currencies when visiting more than one EMU country

• Tourists and consumers who no longer have to spend time making price comparisons across EMU countries, or shopping for the best exchange rates

• Firms 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 Member States

II. The Economics of Monetary Union

The Costs:

• National 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

• Henceforth, 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

The Benefits:

• The elimination 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.

• Given 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.

• The introduction 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.

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Part II. EMU [1] [2] [3] [4] [5] [6] [7] [8] [9] [10]