Term Paper European Monetary Economics

Topic: Advantages of a Monetary Union

Author Name Natasa Resetar

Email natasar60@gmail.com

Matriculation number 3159644

Name of the programme studied

Economics, Bachelor

- Blank space for comments of examiner -

Examiner: Prof. Bernd Hayo / Grade

1. INTRODUCTION

In this essay I will try to prove that having a monetary union has far more
advantages than disadvantages, and that countries in different regions should strive
towards integration in monetary sense. One of the main arguments will actually be the
example, the example of European Union and its monetary politics.

Especially small countries benefit from integration. We will discuss later the
benefits of smaller countries which are gaining a lot from joining the monetary union in
many spheres such as attracting and being more open for the investors and etc.

The structure of this essay is divided in three main parts. First is the general
introduction to the concept of monetary union, how it got into being and its history,
development and membership criteria.

Secondly, I will write about psychological and political advantages of monetary

union. In the third part I will try to explain some of the main and most important
economic advantages (micro-economic and macro-economic). This part includes my main
arguments for the monetary union and it is divided in six parts, which are:

1. Having a non fluctuating currency

2. Cheaper transition costs
3. Transnational currency, example of Euro
4. Increased price transparency
5. Benefits of implementing a single market
6. Forestall devalution and speculation
2. ABOUT MONETARY UNION

The Economic and Monetary Union (EMU) is a major step for economy. Launched in
1992, formed in 1958 by 6 countries, EMU counts 28 member states. Some of them integrated
and adopted the euro. Together, they are forming the area which is having more benefits when
connected than differently.

Nations join together and form a trading bloc, where they agreed to treat trade freely
between themselves, also to adopt common external barriers against nations which are not
members.

Monetary Union is also known as a currency union. European Monetary Union is playing
a significant role, since it is integrating big number of countries which with their enrollment are
having a lot of benefits. One of it is decreasing transactional costs because there is no need for
currency conversion. The trade between countries becomes much easier and brings much more
profit. Also there are 4 freedoms which are movement of capital, people, services and goods. For
young people who are willing to live and study abroad it means a lot.

The biggest achievement of EMU is to have unique currency € (euro) which is now days
used more and more in international trade. Further, we will discuss others advantages.

Taking a look at Monetary Union we can see that it is a big experiment. Big experiment,
which seems to be working so far. By discussing the history and future we can make a lot
conclusion about relevance of it.

For the very first time, in 1962 we have the beginning of formation of the European
monetary union. There are 3 important documents which contributed to establishment of EU.
Werner’s document is one of the three most important documents, the other two are the Delors
Report and the Maastricht Treaty.

Werner’s document (1971) nominated the formation of the European Monetary Union in
three phases.

-The first phase would be ensuring a higher level of economic integration between the EU
Member States.
 -The second phase would be the irreversible convertibility of currencies.

-Finally, the third phase would be the permanent locking of exchange rates – or possibly
the single currency.1

3. ADVANTAGES OF EUROPEAN MONETARY UNION

Advantages as well as disadvantages of being a part of the European Monetary Union can
have both economic and non-economic factors. Non-economic factors include: psychological and
political advantages and disadvantages. The psychological advantages due to stability of
domestic currency are a higher self-respect, and emphasize national identity. For those, who find
political integration desirable, a Monetary Union could be a step closer to the political union.
Potential advantages of being a member of Monetary Union can be classified in two groups:
micro-economic and macro-economic advantages. Micro-economic advantages include: the
enhancement of micro-economic efficiency, the elimination of transaction costs, elimination of
exchange rate fluctuations, an increase in foreign trade, effective capital allocation, increasing
competition, and price transparency. Macro-economic advantages include: elimination of
problems that can arise from foreign currency instability, and low inflation due to independent
European Central Bank, and having euro as the single currency. 2

3a) Non-economic factors

Beside the sharing the same currency, having one central bank and other economic
advantages, on the other side we have a lot of eastern countries which are keen to join EU
especially because of political stability. Also, membership made a lot of countries to become
more modernized. The Nobel Peace Prize 2012 was awarded to European Union (EU) "for over
six decades contributed to the advancement of peace and reconciliation, democracy and human
rights in Europe".3

1
(Miljković, 2008).
2
(Kotilainen, 1992)
3
https://www.nobelprize.org/nobel_prizes/peace/laureates/2012/
3b) Economic factors

As I mentioned earlier economic advantages can be divided in two categories. They are
micro-economic and macro/economic factors. I will write about some of these advantages in the
following section.

1. Advantages of being part of non fluctuating currency

We can see for example that the countries depends a lot of foreign investors. That
especially refers to smaller countries which are having volatile and quite soft exchange rates. By
making currency more stable they attract more and more foreign investors. Fluctuating exchange
rates are increasing the risks in the international trade and in the international investments. If
foreign investors do not have confidence it would reflect on reduction of country’s imports and
exports. Otherwise if the trust in the currency is existing, it will hold its value. In this case it will
be much easier to trade. Not having a weak currency which leads to inflation, bad economics,
budget deficits and so on gives a big plus to the country to be open and more desirable for the
investors.

2. Cheaper transaction costs

Transaction cost disappears when countries choose the same currency. Due to having the
same currency, they do not need to change currency when they are doing business with each
other. This leads to having more money in their pockets, from the view of consumer of goods and
services. This is making the business more safety and makes substantial saving of money.

On one side we have tourists who are benefiting a lot of not having to search for exchange
offices or banks wherever they travel, so they save the commission fees. Second part would take
the companies which do not have to worry about Value Added Tax. By switching to the euro,
members of the EMU were expected to save as much as $30 billion a year. 4 So as we can see
countries are gaining much more profit out of the participation in EMU.

4 (Eudey, 1998).
 3. Euro as an international currency

Today, euro is used as an international currency. It provides stability of companies and national
economy. The implementation of euro has affected the dollar, yen, pound and other currencies in
the way that they have reduced their values on a global level. In 2007 71% member states voted
for the euro, while 21% against it. From this, we can see that euro has a big support from people
who are using it. A lot of people outside the Eurozone use euro as a parallel currency for their
savings. Euro is made so it can make an impact on making a big market like the USA. Having
euro as a currency has helped Amsterdam and Frankfurt to become opponent to New York.
Newyork is considered as a Finance Center so we can notice a big plus of EU as a This
advantage would have even be bigger if the UK become a part of the EMU, since London is a
reliable rival to New York.

4. Increased price transparency

The European Monetary Union have made a big impact in increasing the level of transparency
between member states and inside them. Transparency in literal meanining is limpidity, but it
acctually refers to open bussiness. Specifically, it refers on letting the publicity to have an view in
bussiness acts, financies and etcetera. In this case being familier with prices presents an
enormous benefit for its consumers.

The price transparency makes the prices lower and affects on more intensive competitiveness.
Further it will make market more efficient. Before we had different products for different prices
variating from country to country in European Union because we had different currencies. But
the single currency made prices flat.

Also, we can notice a big increase in use of PC, which further leads to increasement of Internet
trade. In attempt of gainining a better position on market consumers are in need to study the
market before aproaching the same. Setting themselves better on market and choosing the
quallity and price they want they can do due to availability of consumer price posting. With
prices in euro consumers can get the best product with the best offer not including the variable
exchange rates and costs for conversion service.
 5. Benefits of implementing a single market

The European single market has been implemented on 1 January 1993. Single market means
having a free movement of goods and services without any internal borders. It stimulates
competition by cutting prices. Also, that goes hand in hand with another benefits which are
improved efficienty and raised quality. European Commision is working consantly on reaching
the goal which would provide free movement of goods insuring the high safety of consumers and
ofcourse a good enviroment protection. There are two rules for creating single market, one refers
on removing barriers to trade and the other refers on putting together the national rules of the
countries at European Union level. From the picture above we can make an conclusion witch
simplifies the idea of trade and shows the increase of export from 2002-2017.

5
http://ec.europa.eu/eurostat/statistics-explained/index.php/International_trade_in_goods

5
Single market include four freedoms:

1. Free movements of goods

2. Free movement of services

3. Free movement of capital

4. Free movement of persons

6. Forestall devalution and speculation

CONCLUSION

There are a lot of monetary unions in the world, but I consider the example of
European Union special, far more interesting and closer for me to approach it. The
country I come from, Montenegro, right now is on its way to become a part of European
Union, and there is a lot of topics and debates about it. There are 30 chapters opened, and
it is expected to join by 2022. Montenegro is in process of change in order to satisfy all
the requirements of European Union. Especially there is a lot of fighting the corruption
and organized crime before the country gets to join in EU. Montenegro is very small
country and if we stick only to that point of small countries benefiting, the country can
gain a lot.

The fact that different nations can be forming this union is really unique, and I
hope I gave you through this example a closer view about monetary unions and you can
see that they are not just possible, but also desired in other parts of the world as well.
REFERENCES:

1. Eudey, G. (1998). Why Is Europe Forming A Monetary Union. Federal Reserve

Bank of Philadelphia Business Review, 13-21.
2. Kotilainen, M. (1992). The Benefits and Costs of EMU. Unitas, 64(3), 8.
3. Miljković, D. (2008). Međunarodne finansije. Beograd: Centar za izdavačku delatnost
Ekonomskog fakulteta.
4. Salvatore, D. (2009). Euro. Princeton University Press.

http://www.vps.ns.ac.rs/SB/2013/2.3.pdf
https://www.kommers.se/Documents/dokumentarkiv/publikationer/2015/Publ-single-market-4-
freedoms-16-facts.pdf
http://www.amchameu.eu/sites/default/files/amcham_eu_single_market_web.pdf
https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-
coordination/economic-and-monetary-union/what-economic-and-monetary-union-
emu_enhttps://econ.economicshelp.org/2007/03/benefits-of-european-
union.htmlhttps://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-
coordination/economic-and-monetary-union_en
http://ec.europa.eu/eurostat/statistics-explained/index.php/International_trade_in_goods

I hereby confirm that my work does not violate core principles of scientific integrity, in particular
I have refrained from cheating, fabrication, and plagiarism. I understand that violating these
principles implies that I will fail this course.