Leading commentator shave argued that the European Debt Crisis has been particularly damaging for the “European...

Leading commentator shave argued that the European Debt Crisis has been particularly damaging for the “European Periphery” (e.g. Spain, Italy, Greece) because of their adoption of the Euro (common currency). Briefly sketch out the trade-offs involved in adopting a common currency. What are the main economic considerations that weigh on these costs and benefits?

Expert Solution

Having a common currency has many costs and benefits, the benefits of having a common currency between nations:

1. When few nations have a common currency together, it makes it desirable for a third country to do business with these countries which share a common currency. This helps promote business and trade activites in these countries.

2. This common currency becomes a strong and stable currency in the world.

3. The choices presented to the consumers increases and the citizens also enjoy stable prices.

4, There is a strong integration of the financial markets of these nations which opens up investment arenas to the investors in these nations. One added advantage to the investors is that they do not have to bear the risk of exhcnage rate fluctuations as they share a common currency. This also reduces transaction costs between nations.

The costs of having a common currency:

1. One major cost to the nations sharing a common currency is that they loose the freedom to frame their monetary policies independently. Monetary policy would have to be framed commonly for the countries together.

2. There is a risk of uneven development as it is seen in the Euro zone. Though they have a common currency, it cannot be seen as a single economy because the nature of business cycles and economy of every nation is different. This means that creating a common monetary policy becomes difficult as one monetary policy cannot address all the issues of every nation.

Rahul Sunny answered 2 years ago

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