Benefits And Costs Of Using Common Currency In Greece, Germany And Research Paper

Benefits And Costs Of Using Common Currency In Greece, Germany And Eurozone - Research Paper Example 14). As a result of reduced transaction costs, Eurozone nations expected a thirty billion dollar annual savings (The Euro, the European Central Bank, p. 154). Directly as result of eliminating exchange of currencies, the exchange rate volatility was also removed. These exchange rate fluctuations make the trade between countries more risky; because if one currency devalues in relation to other, the marketer of the depreciated currency will be affected by getting less than what his product is worth. Or conversely the buyer of depreciated currency may require paying more than what he originally contracted for (Eudey, pp. 14-15). Exchange rate rish is thus another form of transaction cost which was avoided. Another major benefit of Euro as the common currency was the avoidance of speculation. Before the introduction of Euro, speculation used to greatly occur throughout the Europe. Whenever a currency was thought to be devalued in near future, people used to sell all their holdings in tha t currency. The only solution to the problem of speculation was keeping the interest rates as high as possible to keep the people interest in the currency. These high interest rates were bad for the economy and hindered economic progress in Europe during 90s (Eudey, pp. 15, 16). Adoption of Euro as a common currency thus removed speculation and economies of the member countries could develop and flourish easily without the disadvantages of higher interest rates. Euro also does away with the problem of competitive devaluation of currency among the member nations. Before the era of Euro, European nations used to devalue their currency to increase the exports. Inflation was a direct result of this devalution (Eudey, p. 15). The adoption of common currency did in fact come with many costs as well. The first and the foremost disadvantage of adopting common currency by the Eurozone countries was that by accepting Euro as national currency they surrendered their right to adopt and change t heir monetary and economic policies to suit their domestic conditions (The Euro: Expect, pp. 123). There was another big cost of not being able to adjust the exchange rates between trading countries to eliminate the economic falloffs of individual countries. Even after the adoption of common currency and a unit monetary policy throughout the Eurozone and its many benefits, there is no surety that some member country may not go in recession; and this was the main concern for all the countries. If at any time one country goes into recession, it cannot alter the individual monetary policy and as a result the only option left is to wait, because a change in the monetary policy of all the nations would adversely affect more countries than benefit the country in recession (The Euro, the European Central Bank, pp. 157). Despite of this, the idea of creating a common currency was that by tying many European nations through a common currency, the business cycle of all countries will soon be closely linked to each other and very soon would there be no possibility of recession in one country while stability in other (The Euro: Expectations and Performance, p. 123). However, changes in individual Fiscal policies was allowed. Benefits and Costs of common currency in Greece Recently there has been a debt crisis in Greece and other Eurozone countries which has jeopardized the likelihood of continuing with the Euro. Especially Greece is highly considering to quit the Euro and reverting back to its national currency Drachma. The debt crisis is raising a lot of questions and discussions about the potential advantages and