Advantages of Joining a Monetary Union
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- All central banks are not the same. Some central banks, such as the former German central bank, have a reputation as being very good at keeping economic fluctuations under control (especially inflation). Others, such as the former Italian central bank, do not have as good a track record in controlling fluctuations (especially inflation). If a country's central bank has a good reputation, its policy is said to be credible. A country with a credible central bank will attract international businesses who like the certainty of low inflation fluctuations. When the ECB was formed, it adopted the German model and put a strong emphasis on price stability. Once Italy joined the EMU, they automatically gained the advantage of having a central bank with a reputation for price stability. Thus doing business in Italy became more attractive.
- Smaller countries are more susceptible to exchange rate fluctuations. They export and import much more relative to their size than a large country. Changes to exports and imports, which happen often in smaller economies, cause frequent and some times large fluctuations in the exchange rate. Joining a monetary union brings the advantages of sharing a currency across a group of countries, effectively increasing the economic size of the small country. Big economies - such as small countries in a monetary union - have less frequent and smaller exchange rate fluctuations. Reducing exchange rate fluctuations has the advantage of increasing transparency, lowering transaction costs, and improving trade and investment.