The European Monetary System

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These are difficult times for writing about a common currency, especially when you usually and particularly refer to a common currency in the European Union. The European monetary system, which was supposed to provide a stepping stone to the final stage of Economic and Monetary Union, shortly thereafter has broken down. By saying “broken down” I actually mean that the commitment to manage exchange rates within relatively narrow margins of fluctuation has been relaxed significantly. A common currency was referred as a useful final step to take after the essential one of locking exchange rates, but not an inescapable step in completion of the process. The adoption of a common currency has always been a point of argument and that is why so many reports have been written about that. The report on Economic and Monetary Union in the European Community (Luxembourg 1989) is one of them. It is noteworthy to mention what exactly has been written about the idea of a common currency: “The adoption of a single currency might be seen – for the economic as well as for psychological and political reasons – as a natural and desirable further development of the monetary union. A single currency could clearly demonstrate the irreversibility of the move to monetary union, considerably facilitate in the monetary management of the European Union and avoid the transactions costs of converting currencies.” The benefits of a single currency are mostly situated at the microeconomic level, while the costs of a common currency have to do with the macroeconomic management of the economy. Replacing some countries their national currencies and adopting a common currency can be set to lead to gains in economic efficiency. These gains in efficiency come from either the elimination of transaction costs, which is associated with the exchanging of national moneys, or the elimination of risk due to the uncertain future movements of the exchange rates. To begin with, the reduction of transaction costs is actually referring to not only direct, but also to indirect gains.Firstly, I would like to mention what I actually mean by direct gains. Everyone should have, at least for one time, a personal experience of these transaction costs whenever he would like to exchange one currency to another. Fortunately, these costs have vanished from the time countries move to a common European currency. Consumers would not any more have to change money when travelling and would encounter less red tape when transferring large sums of money across borders. It was estimated that a traveler who want to visit all twelve member states of the European Union, would lose 40% of the value of his money only in transaction charges. Once in a lifetime a family might make one large purchase or transaction across a European border such as buying a holiday home or a piece of furniture. A single currency would help that transaction pass smoothly. Recently there was another estimation of the gains, which were obviousdirectly after the elimination of transaction costs,by the European Community Commission and they actually found out that about twenty billion ECUs per year are saved by the elimination of transaction costs.The transaction costs are like a tax paid by the consumer in exchange for which he gets nothing. For that reason banks have to deal with, a major for them, problem of transition and manage to find other profitable activities. That is the only way for the society to have an actual profit. The elimination of transaction costs offers also a gain in an indirect way. To be more specific, this elimination is responsible for the reduction of the scope for price discrimination between national markets. It is widely known that Europe had experienced that price discrimination before the most countries of Europe adopt as a common currency Euro and the reason was the segmentation of national markets. Therefore, the adoption of a common currency benefits the consumers as they no longer need to...
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