What are the benefits and costs of using a common currency for Greece, Germany and the EU Free Essay Example, 1250 words

Benefits and costs of using Common Currency in Greece, Germany and Eurozone The mutual acceptance of Euro as a common currency between the Eurozone nations does away with exchange of currencies between the Eurozone nations. This resulted in savings due to reduced transaction cost because of the import and export between the many Eurozone nations which required exchanging currencies (Eudey, pp. 14). As a result of reduced transaction costs, Eurozone nations expected a thirty billion dollar annual savings (The Euro, the European Central Bank, p. 154). Directly as result of eliminating exchange of currencies, the exchange rate volatility was also removed. These exchange rate fluctuations make the trade between countries more risky; because if one currency devalues in relation to other, the marketer of the depreciated currency will be affected by getting less than what his product is worth. Or conversely the buyer of depreciated currency may require paying more than what he originally c ontracted for (Eudey, pp. 14-15). Exchange rate rish is thus another form of transaction cost which was avoided. Another major benefit of Euro as the common currency was the avoidance of speculation. We will write a custom essay sample on What are the benefits and costs of using a common currency for Greece, Germany and the EU or any topic specifically for you Only $17.96 $11.86/pageorder now Before the introduction of Euro, speculation used to greatly occur throughout the Europe. Whenever a currency was thought to be devalued in near future, people used to sell all their holdings in that currency. The only solution to the problem of speculation was keeping the interest rates as high as possible to keep the people interest in the currency. These high interest rates were bad for the economy and hindered economic progress in Europe during 90s (Eudey, pp. 15, 16). Adoption of Euro as a common currency thus removed speculation and economies of the member countries could develop and flourish easily without the disadvantages of higher interest rates. Euro also does away with the problem of competitive devaluation of currency among the member nations. Before the era of Euro, European nations used to devalue their currency to increase the exports. Inflation was a direct result of this devalution (Eudey, p. 15). The adoption of common currency did in fact come with many costs as well. The first and the foremost disadvantage of adopting common currency by the Eurozone countries was that by accepting Euro as national currency they surrendered their right to adopt and change their monetary and economic policies to suit their domestic conditions (The Euro: Expect, pp. 123). There was another big cost of not being able to adjust the exchange rates between trading countries to eliminate the economic falloffs of individual countries.