Question

How being tied to a single currency (the Euro) has impacted the different economies of the European Union?

Answer 1

European union is a political and economic union which consist of around 28 states in Europe. The aim of such kind of establishment is to derive economic and political benefits from pooling of resources of various countries together. There are various advantages as well as disadvantages for using a single currency for different states.

Some of the advantages and disadvantages includes:

• Smaller countries in the EU is most benefited, they get backing of big powerhouse economies. For example, countries like Spain and Portugal has high level of debt, and if they will operate in isolation, their currency will not be as strong as EURO. Hence, they receive major benefits by being in European union due to its single currency system.
• Small countries enjoys lower interest rates, if they got out of EU, they will face higher interest rate because of weaker currency and higher debt that these countries are carrying with themselves.
• Big companies of member states has reaped various benefits including economies of scale because of large production at lower level of cost.
• All the member countries have to ensure that central monetary policy framed by the EU is followed among every member country.
• However, not every country is able to completely follow the monetary policy resulting in higher level of debt and fiscal deficit in many smaller countries. This means a weaker EURO which may not be a desirable situation for stronger countries in the EU.
• Countries have to give up their rights of printing money which results in binding on nations to print their own currency and hence in case of recession or deflationary environment, these countries will have to rely on EU for bailout etc.