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Benefits of the EURO
1. Transaction Costs:
There will be no longer a cost involved in changing currencies; this will benefit tourists and firms who trade within the EURO area. It has been estimated that this benefit will be equal to 1% of GDP so will be quite significant. (this is sometimes known as frictional costs)
2. Price Transparency:
With a common currency it will be easier to compare prices in different European countries because they would all be in Euros. This enables firms to source cheaper raw material and consumers to but cheaper goods For example new car prices are much higher in the UK than elsewhere, a single currency could help reduce these price differentials.
3. Eliminating Exchange Rate uncertainty.
Volatile swings in the exchange rate can destroy the profitability of exports. This undermines business confidence in investing. Therefore with a single currency business confidence should improve leading to greater trade and economic growth.
4. Improvement in Inflation Performance.
The ECB which sets interest rates for the whole area will be committed to keeping inflation low, countries with traditionally high inflation will benefit from this. However this point is debatable.
5. Euro could emerge as a global trading currency
6. Inward investment
Inward investment
may increase from outside the EU as firms take advantage of lower transaction costs within the EU area. Recently the Chairman of Nissan said the UK would lose inward investment if it stayed out of the Euro
7. Economizing on foreign currency reserves
8. The financial sector could benefit. It would be easier to conduct banking and insurance with a single currency. It would be easier to trade German shares on the London stock market
Why the UK will never join the Euro
Revision Notes and Essays on the EURO