DIETRICH Course : European Business L3
TUTOR : Lynda Harrison 2005 words
University of Lincoln
The introduction of the Euro has had success in promoting trade and price stability; it has had only limited success in promoting structural reform across the Eurozone. Discussabout it
The single currency has been mentioned for the first time during the Maastricht treaty on the 7th of February in 1992 and was finally established the 1st of January 1999, this date is also the final step of the European monetary Union. The main objectives of this currency were to avoid the speculation and risks of instability of currencies between different member states; toincrease the exchange between the different members of the Eurozone; to have a minimized inflation; to improve the functioning of the market of goods, services and capitals and to make the final step of the common european market to create the biggest common market in the world - and the most important point was to have a currency that competes against the dollar.
Does the Eurozone can be considered asan optimal currency area?
In order to be able to understand the issue it is necessary to define the main terms such as Eurozone which is a group of countries which used the Euro as a common currency composed by 16 European union states and 3 non-EU members (Vatican, Monaco and San Marino). The other main term in the issue is structural reform, which can be defined as a economic and politic issue;the aim is to improve in a sustainable way the functioning of the economy of a sector or a country. They can be used for example to reduce the unemployment or the inflation, support an innovative environment or unlock business potential.
The first part of this assignment will be devoted to give a explanation about the success of the Euro concerning the rise of trade and improvement about theprice stability. The second part of this essay will explain why the Euro only had limited success concerning promoting structural reform across the Eurozone.
Thanks to the introduction of the Euro in 1999, each country within the Eurozone has increased its trades between 5 to 20% since 2000 (Voxeu, 2008). One of the reasons is that the elimination of currency risk of foreign exchangetransactions cost trade among members would promote trade among members (New York Times, 2009) because exchange rates used to cost from 5 to 8 % of the total amount of the transaction. It also reduced the fixed and variable costs of exports. This meant for SMEs which were due to the high costs formerly not able to export that they are now more competitive as the raise of products for which they havesales abroad will create economies of scale. All the improvement concerning trades will increase internal competition in Europe and has increased the access to the common market for people all over Europe. The euro also encouraged people to buy products and services abroad mostly because of transparency of prices which means that it is easier for people now to compare prices between differentcountries because people do not need to convert the price in their own currency.
One of the other successes of the Euro was to maintain a price stability for ten years now. The organism in charge of that issue is the European Central Bank, created in 1998 and based in Frankfurt. Its aim is also to support the general economic policies in the Community and to maintain the purchasing power ofcitizens of the Euro.
The ECB together will all the national banks are members of the Euro system, they control price stability by trying to have an inflation rate below 2% per annum which controls the regulation of prices of products and services. The Euro system is able to control the inflation by a regulation of the interest rate. For example if there are too many Euros in Europe it may have some...