Monetary union
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Revision presentation on advantages and disadvantages of joining the single currency
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Monetary union
- 1. Advantages and Disadvantages of Joining the Euro A Level Macroeconomics (2019 Update) Tutor2u Economics
- 2. What is a monetary union? A monetary union is a deeper form of economic integration It involves nations such as Spain, Italy and Germany transferring monetary policy to the European Central Bank (ECB) and sharing a single currency. The ECB then sets monetary policy interest rates for the whole of the currency bloc and there is also a common inflation target to meet
- 3. The Euro Zone • The single European currency, the euro, was introduced in 1999 and came into common circulation in January 2002 • No country has yet left the Euro Area • As of May 2019, there are nineteen member nations • Of the 28 EU countries prior to Brexit, 9 are not part of the single currency including Denmark and Poland
- 4. European Union Countries Country Joined EU Euro Zone Member? Country Joined EU Euro Zone Member? Austria 1995 Yes Italy 1957 Yes Belgium 1957 Yes Latvia 2004 Yes Bulgaria 2007 No Lithuania 2004 Yes Croatia 2013 No Luxembourg 1957 Yes Cyprus 2004 Yes Malta 2004 Yes Czech Republic 2004 No Netherlands 1957 Yes Denmark 1973 No Poland 2004 No Estonia 2004 Yes Portugal 1986 Yes Finland 1995 Yes Romania 2007 No France 1957 Yes Slovakia 2004 Yes Germany 1957 Yes Slovenia 2004 Yes Greece 1981 Yes Spain 1986 Yes Hungary 2004 No Sweden 1995 No Ireland 1973 Yes United Kingdom 1973 No (leaving EU)
- 5. Advantages of joining the single currency Eliminating currency conversion costs makes it easier and cheaper for consumers and businesses to engage in cross border trade Membership of Euro likely to stimulate inward investment e.g. in industries such as tourism, financial services, car-making Single currency increases price transparency which helps consumers to find products at better prices - increased market contestability Shared currency which eliminates the costly conversion of money might improve labour mobility within the single market Euro is more stable than smaller currencies. Reduced currency risk makes is easier for smaller countries to borrow
- 6. Disadvantages of joining the single currency Sharing a common currency means that a country can no longer rely on a competitive depreciation of their currency as part of monetary policy – they may have to experience an internal devaluation Interest rates are set for the monetary union as a whole – not for anyone country – it is very hard to set a “one-size-fits-all” interest rate All the EU countries have different cycles or are likely to be at different stages in their cycles – a common interest rate might cause divergence rather than convergence in living standards Deeper economic integration brings benefits but also risks – namely that a recession in a trading partner has a severe effect on you – consider the current slowdown in the German economy Membership might expose a government to the financial costs of future bail-outs of struggling countries.
- 7. 2019 Update: Unemployment rates (%) 18.5% 14.1% 10.5% 8.8% 7.8% 7.6% 7.4% 7.3% 6.7% 6.7% 6.5% 6.2% 6.2% 6.2% 5.6% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Greece** Spain Italy France Euro area Croatia Cyprus Latvia Finland Portugal EU Lithuania Sweden Slowakia Belgium
- 8. 2019 update: Inflation (%) in selected EU countries Inflation rate compared to previous year in January 2019, per cent Greece 0.5 Portugal 0.6 Ireland 0.8 Italy 0.9 Malta 1.0 Spain 1.0 Slovenia 1.2 Finland 1.2 France 1.4 Euro area 1.4 Lithuania 1.6 Luxembourg 1.6 Austria 1.7 Germany 1.7
- 11. Advantages and Disadvantages of Joining the Euro A Level Macroeconomics (2019 Update) Tutor2u Economics
Notes de l'éditeur
- Some of the key advantages and disadvantages of a country joining the single European currency (the Euro) are explored in this short updated revision video for the 2019 economics exams.
- A country can become more integrated into the EU single market. Trade creates competition and can stimulate long run economic growth. Businesses no longer have to pay hedging costs which they do today in order to insure themselves against the threat of currency fluctuations
- Contagion effects – classic example – slowdown in the German economy in 2019 The slowdown in Germany and the euro area has come faster than expected, with activity slowing in the second half of 2018 and Germany narrowly avoiding a technical recession. The OECD expects the euro area as a whole to grow at the slowest rate since the euro crisis in 2012-13, with the Italian economy dipping into recession.
- The unemployment rate is an important measure of a country or region’s economic health, and despite unemployment levels in the European Union falling slightly from a peak in early 2013 , they remain high, especially in comparison to what the rates were before the worldwide recession started in 2008. This confirms the continuing stagnation in European markets, which hits young job seekers particularly hard as they struggle to compete against older, more experienced workers for a job, suffering under jobless rates twice as high as general unemployment.
- Greece might have benefitted from a devaluation of the currency and a period of negative real interest rates. But the ECB cannot set interest rates for one country in isolation – especially smaller debt-ridden countries in the South.