Single Currency in Eu

2.1 Introduction

The euro was launched among 11 European Union (EU) members as the single currency for theoretical purpose in January 1999 and then circulated in physical manner in January 2002 (European Commission, 2013). Currently, the euro is shared among 17 of the 28 member states and controlled by one central bank (ibid). However, plenty of obstacles to ultimate harmonisation still persist and currency risks of international trade remain since the creation of euro (Eiteman et al, 2012). Although entering a unified currency area can generate a number of benefits for participants, the disadvantages and difficulties in the implementation process suggest that the single currency policy is not feasible in Europe. In this essay, firstly, the advantages of pursuing a single currency will be briefly presented, then the drawbacks including the poor reaction to economic shocks, inflexible labour force, insufficient budget to adjustment and other costs will be explained to illustrate that Europe is not an optimal currency zone to use a single currency.

2.2 Advantages

Since the adoption of the euro, the Eurozone economy has generated almost 20% of global productivity (CNBC, 2013). Exploiting a single currency can bring a number of benefits for Europe such as reduced transaction costs, stimulated investments, and increased international status.

2.2.1 Economic Efficiency

The main one is considered as the gains in economic efficiency, which can be realised through the elimination of transaction costs and risks that arise from exchange rate uncertainty (De Grauwe, 2000). Transaction costs occur when changing one currency to another in order to buy and sell goods across countries. This can be avoided if a single currency is pursued, which can contribute to the elimination of price differences across international borders and make the prices of goods more transparent (Pszczóka, 1999). In addition, the risk of exchange rate volatility can be removed and this may inspire entrepreneurs to invest and trade more actively (Copeland, 2000).

2.2.2 Investment Incentive

Another benefit is that investment can be stimulated. Companies are willing to increase both direct and portfolio investment due to the reduced expense and eliminated exchange rate risk (De Grauwe, 2000). With the increasing number of competitors, the business competition will become more intense, which results in lower prices and higher trade volume. Additionally, customers that inside the currency union can gain substantial extra gains, since the relative prices of various similar products can be readily compared from anywhere within the common currency area (Rose, 2000).

2.2.3 International Status Enhancement

The third advantage is that euro's international status can be enhanced. According to Chinn and Frankel (2008), the euro may surpass the Dollar to be the leading international currency over the next 15 years. This time will be shortened if euro becomes the common currency in Europe. In this circumstance, various countries will reduce the reserves of dollars while increase the euro reserves, which can attract more investors and increase inflows of capital to Europe.

2.2.4 Labour Market Competition

The final benefit is about labour market. If the common currency is managed, wages will become more competitive due to the intense competition. Workers will not only compete with other employees from their own countries but also from abroad (Michele et al, 2005). Therefore, the wages of employees, especially that in high wage countries may fall, which is beneficial for firms' profits with the labour costs reduced.

2.3 Disadvantages

Though a single currency policy can bring many advantages that mentioned above, there are many shortcomings limit the effectiveness of the instruments to overcome negative shocks and cause additional costs simultaneously.

2.3.1 Monetary Policy

Monetary policy cannot play an efficient role in dealing with negative shocks in a common currency area. Monetary policy is considered as an adjustment tool to control money supply and interest rates with the purpose of promoting economic growth and stability (Gamble, 1998). However, its effectiveness and efficiency will be negatively influenced when a single currency is exploited. When responding to adverse shocks such as severe inflations and low outputs, the needs of European countries should be considered as a whole, even if the policy is highly inappropriate for some member countries. This means that individual member loses the power to make timely monetary policy according to respective national conditions (ibid). Indeed, either symmetric or asymmetric shocks affect countries in the same currency zone distinctly, thus the common monetary policy instruments cannot satisfy every member country's state and is time consuming to be formulated. Moreover, the adjustment of the exchange rate will become impossible with the premise of one single currency (Hishow, 2007). Therefore, this normal economic instrument available for governments to use in regulating the economy will no longer exist. Take the European debt crisis from 2009 to 2012 as an example, due to the inefficient monetary policy, the capital mobility and exchange rate stability were influenced, which contributed to the crisis (Eiteman et al, 2012).

Some may argue that the United States manages a single currency among fifty states, despite various differences exist, and the monetary policy acts effectively. Compared to the European countries, the far less differences and far more similarities in language, politics, history, union membership and other elements