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Title: The Euro
Description: A very brief breakdown of what the euro (as a currency) is and what it is good for as well as an explanation of the factors that make an ideal currency and how the euro fits in to these categories. This is from a chapter of a first-year economics module based in Ireland.
Description: A very brief breakdown of what the euro (as a currency) is and what it is good for as well as an explanation of the factors that make an ideal currency and how the euro fits in to these categories. This is from a chapter of a first-year economics module based in Ireland.
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Economics and Society - The Euro
The Euro – Common Currency Area
Launched in January 1999
o National currencies with common exchange rate
Euro coins and notes introduced in 2002
Eurozone
o Officially known as European Economic and Monetary Union (European EMU)
o Different from the EU
o 18 EU countries in Eurozone
Benefits to Common Currency
No transaction costs or exchange rate fluctuations
o Encourages more within-region travel
o Encourages within-region travel
o Banks lose money of fees
Price Description Reduced
o Easier to “hide” price difference when using different currencies
Cost – Euro Wide Monetary Policy
ECB sets monetary policy
o This will benefit some countries but others will lose from a Euro-wide monetary
policy
o You can only set one monetary policy for all countries
o One country might have great economic growth, other may be n a recession
...
Similar interest rates and Economic cycles
o Countries that have interest rates and similar economic cycles will benefit from
common currency
i
...
strong-weak economic growth at same time
o Problematic when one part of currency area is growing while another is
contracting
Fiscal Integration
o Allows for redistribution within area across countries
Political Integration
o Helps many factors such as fiscal integration and labour mobility
o This is increasing in the eurozone
Symmetric macroeconomic shocks
Debt Challenges for Euro Area
ECB, not Ireland, prints money
Ireland’s only option for reducing debt is to default
o If defaulting is even a slight option, then the price of debt goes up
Low default likelihood for Euro countries (except Greece)
Bond buyers may expect other Euro countries to bail out high-debt countries so bond
rates for low-debt Euro countries may also go up
Fiscal Prudence in Euro Area
Because one country’s high debt can hurt all Euro countries, each country has incentive
to keep debt manageable in other countries
Difficult to do with separate government budgets
2
Stability and Growth Pact
o Pact requires countries to balance budget within 3% of GDP
o Small deficits are not always bad
o If enforced, this rule severely restricts government budgets in recessions
...
3
Title: The Euro
Description: A very brief breakdown of what the euro (as a currency) is and what it is good for as well as an explanation of the factors that make an ideal currency and how the euro fits in to these categories. This is from a chapter of a first-year economics module based in Ireland.
Description: A very brief breakdown of what the euro (as a currency) is and what it is good for as well as an explanation of the factors that make an ideal currency and how the euro fits in to these categories. This is from a chapter of a first-year economics module based in Ireland.