Discussion 4- Economics - Assignment Example

International Trade, single currencies and Exchange rates Insert Insert DISCUSSION 4 Some European countries opted to join the EU inusing the euro for economic and political benefits. However, Countries such as the UK and Sweden opted out of the euro for political reasons. Notably, the UK opted out because the sterling/euro exchange rates changed such that the pound is no longer uncompetitive with the euro. Most countries are seeking similar opt-outs for political reasons rather than looking at other benefits found in the euro zone (Adler-Nissen, 2006).

There are also political reasons for the opt-outs. These countries there more economic reasons associated with using their own currencies rather than the euro.According to Hugger (2008), the Optimum Currency Area (OCA) criteria can examine the feasibility of adopting a common currency by NAFTA (p. 23). Canada and Mexico have high levels of intra-regional trade and openness. According to OCA criteria, open economies reduce the costs of a common currency and reduce asymmetric shocks. From interest rate correlations, U.

S-Canada monetary policies are similar. NAFTA countries are more similar in terms of GDP per capita growth, trade openness and tax to GDP ratios. Given all its benefits, a common currency is feasible for NAFTA. However, like the Euro, member countries must consider political reasons related to adopting a common currency.Theoretical threats of the Euro to the US Dollar in the international trade mean that a common monetary union in North America would allow the United States to compete on the same level ground with the Euro.

Grubel (2000) points out that a single currency in North America would bring benefits to these countries in terms of reduced costs of foreign exchange, decreased interest rates and exchange rate risks. Reduced exchange rates would favor North America in facilitating and expanding international trade (p. 27).ReferencesAdler-Nissen, R. (2006). The diplomacy of opting out: The Impact of opt-out on member state behaviour. ECPR Third Pan-European Conference, Bilgi University. Istanbul.Grubel, H. (2000).

The Merit of a Canada-U.S. Monetary Union. North American Journal of Economics and Finance, 11(1) , 19-40.Hugger, K. (2008). NAFTA Toward a Common Currency: An Economic Feasibility Study. Undergraduate Economic Review,4(1) , 1-40.