European Union Single Currency Policy - Essay Example

European Union single currency policy is beneficial to its member countries. INTRODUCTION: The Maastricht Treaty on European Union gives the exact framework for the replacement of the national currencies in many countries in Europe to only a single currency called the European Union dollar (Burgess 2000, 189). The transition to the new single currency would take effect on January 1, 1999. Going back in time, The European Commission had issued the White Paper on the Completion of the Internal Market. This document emphasised that there should be a free flow of human beings, products and capital within the member states of the European Union. Further, the European “dollar hegemony, thawed out frozen masses of immobilized capital, increased the volume and value of international trade, and opened and expanded markets on a vast scale. It created pressures that, if not irresistible, at least required better and more tenacious defenses, opened horizons beyond anything previously imaginable, yet also posed new regulatory challenges” (Gillingham 2003, 145). There are many advantages and disadvantages in implementing a change of work, place, policy, statute, condition or environment. There are successes, failures and depression brought about by the fluctuations in a currency's market price. The following paragraphs explain the nuances of the single currency European Union economy and other related topics which is pegged on the European Union Dollar. BODY: European Union single currency policy is beneficial to its member countries. The potential benefits as well as expenditures of the single European Monetary Unit had been discussed in length in the European Commission's study entitled One Market, One Money. This report gave four major benefits that the single currency would bring to European Union member countries (Portillo 1998). The first benefit is the reduction in transaction costs. The second benefit is the reduction in risk. The third benefit would be the increase in competition. The last benefit would be the emergence of an international currency to compete on equal footing with the United States dollar. The first benefit is the reduction in transaction costs. The reduction of the transaction costs is connected with the decrease in the need to exchange the currency when one European Union Country like the United Kingdom would have to endure when buying a car from Germany, another European Union member state. Some of the members of the European Union include Sweden, Finland, Latvia, Lithuania, Denmark, United Kingdom, Ireland, Germany, Belgium, Luxemburg, France, Portugal, Spain, Italy, Austria, Hungary, Romania, Bulgaria, Poland and Slovenia (Dale 2003). The second benefit is the reduction in risk. A seller in Germany would be fearful of losing money because the German national currency would increase in relation to the United Kingdom pounds. For, one party will normally gain at the expense of another party when sales and purchases are perfected where the payment or cash receipt would be in a currency different from the currency of the recipient of the cash. Thus, people would think twice before entering into foreign currency pegged sales and purchase transactions. The use of only one currency in situations where a person in Spain would buy a bed from a store in the United Kingdom would be a better business strategy. Both the customer and the seller would be happy to know that they will be paid in the same amount of European dollar. For, the European Union dollar is the single currency that will facilitate faster business transactions (Charlebois, and Sapp 2007). The third benefit would be the increase in competition. The use of only one currency would encourage both the sellers and the buyers to understand each other more clearly. A seller of goods in Finland can now fearless sell his or her goods to a prospective client in Italy because both countries are implementing the European Union dollar as the means of payment for their business transaction. This was not possible before the implementation of the single currency policy because of the the buyer of goods in one country had to translate his or her nation's currency to the currency of the person selling the goods. Likewise, the person selling in Norway would have to pay an extra amount known as conversion fee in order to convert his currency to the currency of the seller. Thus, the playing field has increased from a local currency based sales to one European Union market place characterised by the use of only the European Union single currency situation. Now, the sales people in Spain can travel to any to the other member states without the needed of filing for a tourist visa. In the same manner, the citizens of each of the European Union member states are allowed to travel to another state within the European Union freely on occasion that the travel is not to apply for a job there. In addition, another benefit would be the emergence of an international currency to compete on equal footing with the United States dollar. Gone are the days when the United States currency is the compulsory currency used in the company's business dealings. And a manufacturer in Ireland sells his products to the customer in Poland. Normally, the seller of the goods would not accept payment in the currency of the buyer's country because it is not accepted as the normal mode of payment in the country of seller of the goods. Thus, It is normal for the person buying the goods to convert his or her home country's currency to an international currency. An international currency is the currency that one country accepts as mode of payment for business, personal or other transactions. Plus, the international currency then is popularly knows as the United States dollar. The advent of the European Union currency had now eliminated the need to convert the Italian currency of the purchaser living in Italy to the currency of Norway because it is the place of business of the seller of goods. Probably, this is one reason why the United States currency has devalued. The economic theory of supply and demand states that the buyer is willing to pay a higher price for a product if there is a scarcity of such goods. This is the reason why gold and natural diamonds are have higher value in the market than the value assigned to apples and cherries. And, the people living outside the European Union and the United States can choose between converting their local country's currency to either the United States dollar or the European Union dollar. Currently, the United States currency is not a very good choice because such currency has devalued. The United States is currently in an economic depression state. The term depression brings to mind the great depression in the United States where many shops had to close down because there were too many . The United States is currently in a state of depression. For, depression is characterised by scenes like many companies closing down because there are no drop in as well as regular customers visiting the store premises. In addition, the decline in sales resulted to the decline in the net profits of the company. The decline in the net profits of the company would normally precipitate to some expected reactions(Helbing et al. 2006). Also, these reactions are used to counteract the depression by reducing the effects of the depression. One such strategy to reduce the expenses of the company. One major expense that the company generally removes in times of net loss or poor business operations is the labor cost. Also, the management officers would be hard -pressed to retrenched employees who are redundancy or not needed. Thus, people outside the United States will prefer to convert their native currencies to the European Union dollar when compared with the economic benefits of translating one's own currency (for example; a resident of Japan and Korea determining if they would trust their assets to them without even thinking about them) (Christiano, and Fitzgerald 2003). Furthermore, depression is characterized by “In periods of economic depression, when the surplus of labor swells to such a state that it is no longer considered a beneficial pool and becomes instead a horde of unproductive and unconsuming unemployed, the balance is destroyed and the system stalls. During these hard times the man on the move no longer looks like a hero as he stands in soup lines, begs at back doors, scavenges through garbage dumps, and sleeps in make-shift shelters, on park benches” this quote clearly states that the depression currently hitting the United States is hard to ensure. For, companies will continue to try to survive in time when the current and prospective companies are forced to retrench their employees to reduce the daily losses from operating their business. Here, an Irish person would prefer to hang on to his or her European Union dollar and not exchange it for the declining value of the United States (Crouse 1986, 2). There have been many successes with its operation to date. One of the successes include “By the end of 1985, the Geman DM had appreciated from DM 2.85 to DM 2.65 against the dollar. For Pöhl, the slide of the dollar had reached a point in December 1985 that was acceptable to the Germans. He also faced intense domestic pressure by many leading German industrial exporters, especially in the auto and machinery industry, concerned about their competitiveness on world markets.(Humphrey, Lecler, and Salerno 2000, 73)” This quote shows that the increase in the value of the German currency is advantageous to some some parties. Clearly the German IMPORTING companies would benefit from the strengthening of their currency as against the American dollar. Now, the German importing company can buy more goods with a better German Currency than before. In addition, the exporters located in the German state would surely not be happy with the continued increase in the value of the German currency when compared with the American currency. Thus, the increase in the value of the United States currency has its advantages and disadvantages. The conversion of the local currencies to the single European dollar would surely relieve the buyers and seller the fear of losing money because the currency of one is increased in relation to another currency(Dermine and Hillion 1999, 27). Another advantage of the single currency trading is “The Euro-deposit and the cross-border payment systems will be affected by the introduction of a single currency. Since the location of the Euro-deposit market is affected by the relative size of the net regulatory and fiscal burden, one waits to find out the tools of European monetary policy, and in particular the level and coverage of the reserve requirement, as well as the fiscal rules that will apply.(Dermine and Hillion 1999, 27)” This has been clearly explained in prior paragraphs. There have been many failures with its operation to date. One such data indicates that “Why has the value of the euro fallen? This author -economist believes that the Central Bank's efforts to support the euro slowed economic growth to the point that it caused the value of the euro to fall. He traces the ECB's policy errors in recent years as a failure to understand the pro-growth bias of financial markets (Bibow 2002)” This was stated by the author to show that there are some disadvantages of implementing the single currency way of life in the European Union horizon. Following the rules implemented by all members states may cause harm that include delays and lesser profits. And, some individuals thrive on the volatility or wilderness of the fluctuations in currency exchange prices. The European Union single currency was made to eliminate this thrill or excitement of rising currency prices. The member states of the European Union should not depend on exports alone to increase their economic growth indefinitely because they should focus growth on their local markets. Another failure of the Single currency system is that it completely changes the economic make -up of many of the European Union member states. The United Kingdom has always aligned its economic system with that of its former colony, the United States. On the other hand, the implementation of the single currency system has forced the United Kingdom to adopt the European Union style of economic activity that is far different from the normal United States economic activity. London was the center of financial activity before the entrance of the United Kingdom to the single currency unit. In fact, the economic activity of the United Kingdom is basically an open trading economy(Nash 1996). Further, the delay in the entrance of the United Kingdom to the single currency system was because United Kingdom had to make sure that the current importance of London will not be removed. The United Kingdom economy normally favours international commitments that inspire financial stability. However, this must go hand in hand with the United Kingdom's policy of protecting the financial and and political interest of London. This only shows that some countries are slow joiners in the single currency system because they have be convinced that joining the single currency system would bring more advantages than disadvantages (Dyson 2002, 101). Another failure of the single currency system is that there seems to be a change of stance from the former use of the United States economic system to a different and unique European Union system pegged in European Union dollar or simply the Euro dollar. And “The differences between the United States and the European Union are not necessarily an obstacle to the development of an already fruitful relationship: as I said above, the entire philosophy of the EU is based on the value of diversity. Also, the three main lines of development we are now following (the single currency, the pacific reunification and stabilization of the continent, and the implementation of a common foreign and security policy) will make the European Union a stronger partner for the United States, in a constantly developing transatlantic partnership” (Prodi 2001, 7). This quote states that the members of the European Union have set up their own single currency to gain more advantages than disadvantages. The change to the single currency has resulted to some countries being forced to change their economic outlook from a smaller one country policy to a common European Union goal. The bigger European Union is now the new and bigger partner of the United States in the same transatlantic partnership. Another failure of the single currency policy of the European Union is that the Eurodollar fluctuates erratically. This is because the currency is still new and that “Monetary developments in the eurozone's economy are hardly a success, though: Between the start of 1999 and October 2000 the euro lost some 20 percent of its initial external value (even 30 percent vis-a-vis the U.S. dollar). After a brief rebound toward the end of 2000, the euro fell back close to its historical trough and dangled around $0.85 by mid-2001. Among other things, pronounced euro weakness pushed up prices in the eurozone. Consumer price inflation has quadrupled since the euro's inception (accelerating from 0.8 percent in January 1999 to 3.4 percent in May 2001).” This quote clearly shows that the path taken by the members of the European Union member states in terms of implementing the single currency policy is not as smooth or as rosy as it seems. The European dollar is just like the other currencies because its conversion rate fluctuates depending upon the demand and the supply of the currency. CONCLUSION: European Union single currency policy is beneficial to its member countries. The are four major benefits that the single currency would bring to European Union member countries. Clearly, the first benefit is the reduction in transaction costs. Evidently, the second benefit is the reduction in risk. Surely, the third benefit would be the increase in competition. Undoubtedly, the last benefit would be the emergence of an international currency to compete on equal footing with the United States dollar. There have been many successes with its operation to date. Clearly, one of the successes include “By the end of 1985, the Geman DM had appreciated from DM 2.85 to DM 2.65 against the dollar. For Pöhl, the slide of the dollar had reached a point in December 1985 that was acceptable to the Germans. Surely, the exporters located in the German state would surely not be happy with the continued increase in the value of the German currency when compared with the American currency. There have been many failures with its operation to date. Unquestionably, one such data indicates that “Why has the value of the euro fallen? This author -economist believes that the Central Bank's efforts to support the euro slowed economic growth to the point that it caused the value of the euro to fall. He traces the ECB's policy errors in recent years as a failure to understand the pro-growth bias of financial markets (Bibow 2002)” Truly, another failure of the Single currency system is that it completely changes the economic make -up of many of the European Union member states. Naturally, the delay in the entrance of the United Kingdom to the single currency system was because United Kingdom had to make sure that the current importance of London will not be removed. Correctly, another failure of the single currency system is that there seems to be a change of stance from the former use of the United States economic system to a different and unique European Union system pegged in European Union dollar or simply the Euro dollar. Evidently, another failure of the single currency policy of the European Union is that the Eurodollar fluctuates erratically. Works Cited Bibow, Jorg. 2002. The Euro: Market Failure or Central Bank Failure?. Challenge 45, no. 3: 83+. Burgess, Michael. 2000. Federalism and European Union : The Building of Europe, 1950-2000 /. London: Routledge. Burkett, Paul. 1994. Forgetting the Lessons of the Great Depression. Review of Social Economy 52, no. 1: 60+. Charlebois, Maxime, and Stephen Sapp. 2007. Temporal Patterns in Foreign Exchange Returns and Options. Journal of Money, Credit & Banking 39, no. 2-3: 443+. Christiano, Lawrence J., and Terry J. Fitzgerald. 2003. Inflation and Monetary Policy in the Twentieth Century. Economic Perspectives 27, no. 1: 22+. Crouse, Joan M. 1986. The Homeless Transient in the Great Depression : New York State, 1929-1941 /. Albany, NY: State University of New York Press. Dale, Reginald. 2003. European Union, Properly Construed. Policy Review , no. 122: 39+. Dermine, Jean and Pierre Hillion, eds. 1999. European Capital Markets with a Single Currency. Oxford: Oxford University Press. Dyson, Kenneth, ed. 2002. European States and the Euro: Europeanization, Variation, and Convergence. New York: Oxford University Press. Gillingham, John. 2003. European Integration, 1950-2003: Superstate or New Market Economy?. Cambridge, England: Cambridge University Press. Helbing, Thomas, Florence Jaumotte, Martin Sommer, Laurence Ball, and Angela Espiritu. 2006. Chapter III: How Has Globalization Affected Inflation?. World Economic Outlook : 97+. Humphrey, John, Yveline Lecler, and Mario Sergio Salerno, eds. 2000. 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