Posted: September 27th, 2020
Disadvantages of Single Currency
The disadvantages of single currency could start from transferring the joining members financial policies directly to whatever will be at centre of the arrangement. Hence, what is going to take place in the case of Europe is the European Central Bank (ECB) will be the one that will making the decisions, where its members had agreed not be influenced by the countries they are representing.
What such an arrangement leads to is areas that involve interest rate and any other monetary decision would be carried out taking the whole region into consideration, where no other interest rate or exchange rate will be prevalent other than the one that had been made applicable for the region. Eichengreen, Barry. , 1990 “One Money for Europe? Lessons from the U. S. Currency and Custom Union”, Economic Policy 10 117-87 Emerson, M. et al. (1992), “One Market, One Money”. Oxford University Press. Shocks both symmetric and asymmetric that could affect different countries differently needed mentioning, but that was not the case.
The acceptance was taking a single measure, such as changing the interest rate, could stabilize symmetric shocks that could affect all or the majority of the members. The problem highlighted was asymmetric shocks would be difficult to deal with since they do not affect the whole members similarly (Weber 1991 207). Good examples are oil and manufacturing, simply because every member nation might not be exporting oil or for that matter might be at different levels of manufacturing and exporting such goods.
What this would mean is any particular member nation that would suffer asymmetric shock cannot devalue or bring down its interest rate, as the whole responsibility had been transferred to the ECB that does not have a mandate to adjust the interest rate, the exchange rates, and other financial policies of each member countries, according to their particular needs. Therefore, when that occurs the outcome would be unfavourable in such a way that if output and employment were among those affected adversely, the only way to correct that would be for worker to migrate to regions that not affected by the asymmetric shock.
Provided that is possible, the ramification could complicate matters more. The findings also indicate that mobility of labour in Europe is much less than to similar countries such as the U. S. , for example, where there is no language or custom barrier. To make things Eichengreen, Barry., 1990 “One Money for Europe? Lessons from the U. S. Currency and Custom Union”, Economic Policy 10 117-87 Emerson, M. et al. (1992), “One Market, One Money”. Oxford University Press. Weber, Axel, 1991, “EMU and Asymmetries and Adjustment Problems in the EMS – Some Empirical Evidence,” European Economy, 1, 187-207.
Worse the EU does not encourage labour mobility, instead it stresses solutions would be created wherever they show deterioration and that might not definitely be a timely response for a crisis. The only solution for such calamities could be real wages and prices should come down that will require making a painful adjustment. The long held belief; at least after the introduction of a single currency was it will eliminate the prevalent disparity that exists among the various countries, by introducing some kind of a mechanism that will prevent shocks from affecting different member countries differently.
That did not materialize simply because trade itself is the outcome of comparative advantages, where competition itself will introduce specialization and avoiding being vulnerable to what could happen to a given sector is unavoidable (Bun and Klaasen 2002). It is not difficult to mention such specializations since Germany has a robust manufacturing sector, while Britain has its much larger financial sector; as well, it is the only member that exports oil. At the end of the day it is not only difficult to avoid asymmetrical shocks, but mitigating the effect itself will become difficult without digressing some of the rules.
