Question

The question is base on Europe.Identify and briefly describe three main benefits associated with monetary unions.

Answer 1

The three main benefits associated to European Monetary Union are ;

1). Transaction Cost Reduction :

Along with the elimination of need to exchange currencies , transactions costs reduced . Transaction Cost Reduction can be seen through visible and invisible savings . Visiblee household and company savings due to reduced costs associated with exchange of currency by firms that import or export .

Eliminating exchange rate fluctuation leads to fulfillment of objectives and leads to fair Financial report .Euro as single currency helps in reduction of direct costs in exchange and lower accountancy costs in cooperative sector .

Thus EMU members are allowed to travel at low cost .

Reduced costs of exchange helped tourists mostly as they now have to pay a minimum as a commission to authority of exchange instead of bearing total transaction Cost .

Nearly now the members of EMU now save $ 30 billion a year .Thus, maintaining a single currency seems profitable .

2). Reducing Risk of Exchange Rate Fluctuation :

Flexible exchange rates can cause Risk in International trade and international Investment .

A large no. Of opinion poll asserts the aversion of exchange rate risk that contractors and investors have .Some claim that exchange rate risk actually stop with flat currency transition ,yet the risk occurs in quite another form .

If one currency value drops in relation to other then producer will receive a much smaller amount of money for his product than he had or importer might have to pay more money than arranged .

Thus, eliminating the risk of exchange rate fluctuation will help International trade by giving benefits to all EMU members .

The risk of exchange rate fluctuation at foreign investment income is removed with introduction of single currency .By removing different no. Of currencies the important obstacle to direct foreign investment income is eliminated .

Thus , eliminating exchange rate reduces the risk of Exchange Rate Fluctuation .

3). Preventing Competitive Devaluation and Speculation :

Competitive devaluation implies that a company devalues it's currency in order to export more commodities .As a response to this trade partners would make the same move which resulted in inflationary spiral in terms of currency value as well as increased inflation .Thus EMU goal is to retain inflation rates at Low level ,thus introduction of single currency makes sense .

The single currency would eliminate speculation within the EMU member state . With elimination of Speculation ,the EMU member state economies were able to develop faster than they could before , when artificially high commission rates were needed for speculation defence .Now when devaluation is impossible bigger credibility of fiscal policy becomes more secured .