Euro

:For other uses, see {{PAGENAME}} (disambiguation) or EUR (disambiguation).

Effects of a single currency

Having a single currency is expected to increase the economic interdependency of and the ease of trade between the EU members that have adopted the euro. This, in theory, should be beneficial for citizens of the euro area, as increases in trade are historically one of the main driving forces of economic growth. Moreover, this would fit with the long-term purpose of a unified market within the European Union, including (since 1992) the free movement of persons, goods and capital. Free movement of services industries remains constrained, with France particularly resistant.

Related Topics:
Unified market - European Union

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

A major benefit is the removal of bank transaction charges that previously were a significant cost to both individuals and businesses when exchanging from one national currency to another. Conversely, banks suffered a corresponding reduction in profits with the loss of this income.

Related Topics:
Bank - Business

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

A second effect of the common European currency is that differences in prices—in particular in price levels—should decrease. Differences in prices can trigger arbitrage, e.g. artificial trade in a commodity between countries purely to exploit the price differential, which will tend to equalise prices across the euro area. This should also result in increased competition between companies, which should help to contain inflation and which therefore will be beneficial to consumers.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Competive funding is also a plus for many countries (and companies) that adopted the euro.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Some economists are concerned about the possible dangers of adopting a single currency for a large and diverse area. Because the Eurozone has a single monetary policy (and so a single interest rate), set by the ECB, it cannot be fine-tuned for the economic situation in each individual country (however, prior to the introduction of the euro, exchange rates were already very much in sync after the latest european currency crisis in the early 1990s). Public investment and fiscal policy in each country is thus the only way in which government-led economic stimulus can be introduced specific to each region or nation. Eurozone members are experiencing relatively large variations in inflation and unemployment, though not great enough to cause significant economic damage.

Related Topics:
Public investment - Fiscal policy

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Others point out that the Eurozone is similar in size and population to the United States, which has a single currency and a single monetary policy set by the Federal Reserve. However, the individual states that make up the USA have less regional autonomy and a more homogeneous economy than the nations of the EU. Of particular concern in accordance with this theory is the notion that the economies of the EU may not all be 'in sync'—each may be at a different stage in the boom and bust cycle, or just be experiencing different inflationary pressures. Labour mobility is also much lower in the Eurozone than across the United States, largely due to the vast differences in language and culture between European nations, and despite labour, capital and goods full mobility rules.

Related Topics:
United States - Federal Reserve - Regional autonomy - Boom and bust

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

It can also be argued that the single currency works for the USA because the US dollar is a hegemonic currency. Before the euro, eighty per cent of the world's currency reserves were held in US dollars. This gives the US economy a huge subsidy in that reserve dollars are invested in US institutions or foreign institutions under US control. This subsidy helps cushion the effects of a possible strong dollar hurting certain regions of the USA.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

If the euro were to become either a hegemonic currency replacing the dollar or a co-hegemonic currency equal in reserve status to the dollar, some of the subsidy the USA gains would be transferred to the EU and help balance out some of the problems of the present heterogeneous economic structure still in place.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

It has been said that the euro would add great liquidity to the financial markets in Europe. Governments and companies can now borrow money in euros instead of their local currency, and this would allow access to many more sources of funds. Other economists consider that the potential strength of the Eurozone would be in the coherent efforts of a virtual greater super-economy, in which it is now potentially easier to create stronger financial associations, rather than in the mere sum of single liquidities.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The euro and oil

A final and possibly decisive effect is on the pricing of oil. The Eurozone consumes more imported petroleum than the United States. This would mean that more euros than US dollars would flow into the OPEC nations, except that oil is priced by those nations in US dollars only. There have been frequent discussions at OPEC about pricing oil in euros, which would have various effects, among them, requiring nations to hold stores of euros to buy oil, rather than the US dollars that they hold now. Venezuela under Hugo Chávez has been a vocal proponent of this scheme, despite selling most of its own oil to the United States. Another proponent was Saddam Hussein of Iraq, which holds the world's second largest oil reserves. Since 2000 Iraq had used the Euro as oil export currency. In 2002, Iraq changed its US dollars into euro, just a few months before the USA decided to declare war and subsequently invaded the country. If implemented by the OPEC, the changeover to Euro would be a transfer of a 'float' that presently subsidises the United States to subsidise the European Union instead. Another effect would be that the price of oil in the Eurozone would more closely follow the world price. When oil prices skyrocketed to almost 50 US dollars in August 2004, the oil price in euros didn't change nearly as much because of the concurrent rise in the exchange rate of the euro to the US dollar (to an exchange rate of EUR 1.00 = USD 1.33 in December 2004). Similarly, should oil prices lower significantly, together with the USD/EUR exchange rate, the oil price in the Eurozone would not fall as much. On the other hand, if the exchange rate and the oil price move in different directions, oil price changes are magnified. Pricing oil in euros would nullify this dependency of European oil prices on the USD/EUR exchange rate.

Related Topics:
Petroleum - OPEC - Venezuela - Hugo Chávez - Saddam Hussein - Iraq - 2000 - 2002 - USA - Float - August 2004 - Exchange rate

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The deficit structure of the US economy relies heavily on the dollar's hegemonic reserve status as a means of securing US debts and deficits. Without this status, the dollar and the US economy might experience what many Latin American countries experienced during the 1980s. As long as the US dollar was not threatened, the US economy was in no danger of collapse. The individual European currencies offered no threat to the dollar's hegemonic position. In the opinion of some economists the euro may pose a threat to US dollar hegemony, and could under certain circumstances result in a US economic collapse.

Related Topics:
Latin America - 1980s

~ ~ ~ ~ ~ ~ ~ ~ ~ ~