Is the Euro a good idea?

On Jan. 1, 1999, the European Union introduced its new currency, the euro. The euro was created to promote growth, stability, and economic integration in Europe.

Benefits

■ It removes obstacles to trade by extending the Single Market. Traders and travellers are free of the constraints of currency conversion rates. This creates a certainty in trade prices, enabling traders to trade on lower profit margins and therefore creating savings and reducing prices. The main benefits of the euro are related to increased trade. Travel was made easier by removing the need for exchanging money. More importantly, the currency risks were eliminated from European trade. With the euro, European businesses can easily lock in the best prices from suppliers in other eurozone countries.

■ There is greater transparency over prices, which benefits producers, cross-border traders and consumers alike. The euro also supports cross-border investments within the eurozone. Investors in countries using foreign currencies face significant foreign exchange risk, which can lead to an inefficient allocation of capital.

Before the euro, successful companies in countries with weak currencies still had to pay high interest rates. On the other hand, less efficient firms in nations with stable currencies enjoyed relatively low interest rates.

■ The Stability and Growth Pact (SGP) ensures economic stability and thus low inflation. The euro is the official currency of the Eurozone, which consists of 19 of the 28 (pre-Brexit) EU member states

■ The EMU is, in theory, less vulnerable to the world currency markets, allowing the EU to have a greater financial and economic global influence, to the extent that within organisations like the World Bank and IMF, the EU is able to counterbalance the USA.

■ Pooling sovereignty arguably strengthens, rather than weakens, EMU member-state sovereignty. This is arguably especially true in an increasingly globalised world in which national monetary sovereignty is already challenged.

■ Before the EMU was established, the Bundesbank (the German Federal Bank), rather than the ECB, controlled EU monetary policy. Many other European countries (especially France) were unhappy with Germany’s economic control of the union. The EMU redresses this imbalance.

■ Many see the euro as a further step towards a federalist political union, leading to greater integration. This could include harmonising taxes or larger budgets to offset the negative impacts of depressed areas. Furthermore, it also helps to foster the EU’s cosmopolitan identity and creates a stronger European identity.

The EURO: drawbacks

■ There are economic risks, including the capacity for the ECB to misjudge monetary policy and the potential for EMU governments to ignore, or sidestep, SGP rules. In fact, both France and Germany flouted these rules in the mid-2000s by overspending and exceeding the 3% of GDP limit on a state’s budget deficit.

By far, the largest drawback of the euro is a single monetary policy that often does not fit local economic conditions. It is common for parts of the EU to be prospering, with high growth and low unemployment. In contrast, others suffer from prolonged economic downturns and high unemployment.

The classic Keynesian solutions for these problems are entirely different. The high growth country ought to have high interest rates to prevent inflation, overheating, and an eventual economic crash. The low growth country should lower interest rates to stimulate borrowing. In theory, countries with high unemployment do not need to worry much about inflation because of the availability of the unemployed to produce more goods. Unfortunately, interest rates cannot be simultaneously raised in the high growth country and lowered in the low growth country when they have a single currency like the euro.

■ Policies won’t always benefit all states. For example, interest rates that suit some have a negative impact on others. The SGP gives EMU member states the ability to employ measures traditionally used to boost weakened economies, for example raising public spending to tackle unemployment.

■ Politically, there is the cost to national sovereignty over some key areas of economic and monetary policy, as well as an element of hypocrisy as to how this is enforced among EMU members.

■ There is a democratic deficit issue, given that sovereign responsibility to regulate monetary policy is removed and transferred to an unelected independent central body (the ECB).