European Monetary Union Essay Research Paper The

European Monetary Union Essay, Research Paper

The liberalization of trade is a historical phenomenon, which goes back a long way. Never before has any regional grouping made up of sovereign countries succeeded in taking economic integration as far as the European Union has done. Customs duties between European countries started to come down steadily in the early 1950s and disappeared entirely in 1968 with the introduction of a customs union and the implementation of the common external tariff. The official proclamation of the single market on 1 January 1993 marked the ending of non-tariff barriers to trade between Member States.

European Monetary Union will make it possible to complete European economic integration. The disappearance of the national currencies will mean that the prices of goods can be directly compared on the markets of the participating Member States, which will merge into one. The transaction costs and the exchange risk, which are obstacles to trade will be eliminated. The competitive positions of companies can no longer be established by exchange-rate movements but will reflect productivity, inflation and cost differentials. This should permit a better allocation of capital and of available resources. Over and above its positive effects on price stability and public finances, the single currency will make it possible to complete the single market and increase the benefits, which have already flowed from it.

Monetary Union will create an area within which national financial markets will become an integrated, wider and more flexible market. Financial institutions and financial centers will face new competitive conditions. The size of a specific national market will lose its significance. Competition will increase and could lead to greater harmonization across the euro area.

The introduction of the euro will have a great impact on the financial sector. This is because of three main reasons:

? The European System of Central Banks will be operating the single monetary policy in euro. So, it will be necessary for financial institutions to be able to operate in euro.

? Governments will issue all new debt in euro. Therefore, financial institutions, payment systems and clearing systems will have to be prepared to operate in euro from the start of monetary union..

? Businesses and citizens may decide to use financial products denominated in euro at any time during the transition period. A financial institution that fails to provide such services would run the risk of losing business.

The introduction of the euro is important not only for the Union and its Member States but also for their partners. It is evident that the euro will produce important changes on financial markets, but they will not be disruptive to the international economy. The international role of the euro will probably be felt first in the countries where economic and trade links with the European Union are strong. In the countries of Central and Eastern Europe, for instance, where there is a shift from the dollar to the Deutsche Mark and later on to the euro. Gradually its role will grow at world level, as markets realize that the euro is a stable currency. The size of EMU and the integration of its financial markets imply that the euro will become a major world currency. Countries, which are less developed will be likely to use the euro as an official reserve currency.

The size of the euro area and its high competitiveness in the world will gradually switch the transactions to euro. European companies will have advantage in issuing invoices in euro, in the same way like the American companies are issuing invoices in dollars. They will no longer face the risk of currency shocks. This will increase the competitiveness of the European companies worldwide.

The interest rates are important aspect in the financial system of the union. The European Monetary Union will decrease the interest rates, due to the following factors:

? The stability of the euro will be guaranteed by an independent central bank. Countries, members of the Monetary Union will benefit from low interest rates, because the inflation will decrease as well as the risk.

? The member countries desire price stability, which is possible with lower interest rates and inflation.

? The growth will be more stable, which will ensure lower interest rates and the investments will increase which will increase growth and so on.

? The liquidity of the financial markets in euro is expected to become greater, which will lead to lower interest rates.

There is already a good example of the statements above. Since 1992, long term interest rates have fallen in Europe by more than 3 % on average and short term interest rates by more than 6 %. The difference in long term interest rates of the major euro currencies has virtually disappeared.

There is a concern that replacing one or more currencies by a single currency will increase inflation, as low prices are rounded up. The decimalization in United Kingdom and Ireland did not result in higher prices. The change of the European currencies with the euro should have low effect on inflation or the inflation may even go down because of the competition. It will be easier for producers and consumers to compare prices. This will result in higher competition because consumers c