Costs and Benefits of Joining a Monetary Union
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On January 1st, 1999 eleven countries in Europe adopted a common currency and formed a monetary union. By January 1st, 2002 all national currencies ceased to circulate and were replaced by the euro. Arriving at this point involved careful planning, but why? (Click here for the history.)
As with almost anything in life, there are potential costs and benefits to becoming a member of a monetary union. Political leaders in many European countries decided that the benefits outweighed the costs and commenced with the formation of the European Monetary Union (EMU). This monetary union has continued and will continue to enlarge.
So what are the costs and benefits of joining the EMU?
- No more exchange rate between participating members! This leads to greater competition, lower prices, and more international trade and investment because there is
- For many countries, monetary policy conducted by the European Central Bank (ECB) will be more credible than that conducted by its own central bank. This leads to greater price and exchange rate stability.
- It could encourage greater economic unification.
- Some possible benefits that are not necessarily economic include
- Increased global status
- The euro is beginning to rival the dollar as a reserve currency of choice.
- The perceived strength of a country is tied to the strength and world clout of its currency
- Greater possible political integration and thus influence in international affairs
- If you are not an optimal currency area, joining a monetary union can lead to the following:
- Costs that are not necessarily economic include
- Loss of some country identity and culture.
- For example, you can no longer put the picture of your heroes on your currency.