Examine the Benefits and Costs of Two or More Countries Sharing a Common Currency, and Comment on the Impact of the ‘One Size Fits All’ Monetary Policy of the Eurozone.

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Economic Integration Assignment

Examine the benefits and costs of two or more countries sharing a common currency, and comment on the impact of the ‘one size fits all’ monetary policy of the Eurozone.

Normally, the accumulation of a set of countries accepting a specific common currency is known as a monetary union. This involves the countries becoming part of the same trading bloc and accepting free trade policies between the member countries. Since the focus of the question is centrally revolved around the monetary union, the other aspects of the union will not be considered in detail. Naturally, the prime example to use when discussing the use of a common currency is the European Monetary Union. Launched on January 1st 1999, the union boasts a 16 country agreement to use the same currency- the euro. For countries to merge by a single currency requires the merging countries to meet certain criteria. This obviously brings both benefits and costs to the table. Benefits are associated with higher stability of the union as only those countries that meet the minimum requirements can join. This allows the union to ensure that the countries that join add something to the union and add value to the currency. For example, conditions in the European Monetary Union state entrant countries must have interest rates within 2% of the 3 lowest interest rate countries in the EMU and also have inflation within 1.5%. This is important because if we take a scenario where the inflation rate is excessively high in a country, then this will affect the value of the currency by devaluing it. This devaluation has clear knock on effects as the devaluation will cause the cost of imports to rise. Domestic consumers will also shy away from domestic consumption as they see the high prices and so they will shift their consumption on consumer durables from other countries. Exports would be heavily affected by this scenario as the foreign countries would see the high prices associated...
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