The European Economic Community And The Euro — страница 2

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development.” The euro has given Europe one of the largest and most powerful trading blocs in the world. Although the euro doesn’t alter the fact that Euroland is composed of diverse and highly independent countries, it strengthens the economic and political ties of the region and its part in the world economy. Because of the success of the euro will ultimately be determined by the collaboration of EEC governments through the formulation of exchange rate policy to the harmonization of legal systems and security policy, the concept of western Europe as a single economic and political bloc is now more applicable than ever. The euro creates the second-largest single currency area in the world, one that follows the United States in total output. When and if Great Britain, Sweden,

Denmark, and Greece join the euro area, Europe will easily surpass the United States in total economic output. Already, Europe is home to more people who are united by a single currency than is the United States or Japan. Whereas the costs of a common currency have much to do with the macroeconomic management of the economy, the benefits are mostly situated at the microeconomic level. Eliminating national currencies and moving to a common currency can be expected to lead to gains in economic efficiency. The euro’s four primary and direct benefits are: the reduction of transaction costs, the elimination of exchange rate risk, increased price transparency, and the creation of deep financial markets. The first benefit that has come about as a result of the integration of the euro

into the EEC has been the elimination of exchange rate risk. In the international business environment, decisions made today are often adversely affected by future shifts in exchange rates. The more unpredictable exchange rates are, the more risky are foreign investments and the less likely companies are to pursue growth in foreign markets. By replacing European national currencies, the euro eliminates exchange rate risk between participating currencies. This will be a bonus to international investment in Euroland. Exchange rate risk is potentially troublesome to any consumer, producer, or investor who makes an economic decision today that results in a payoff, or the delivery of the good or service at a later date. Firms have often used hedging techniques in order to protect

themselves from these fluctuating exchange rates. By hedging, firms buy the right to exchange foreign currencies in the future for the price that prevails today. But hedging has a price, just as any insurance policy has a price. It is not free and is not available to every business. A second benefit of the euro has been the elimination of transaction costs. Tourists planning European excursions before the euro found themselves with the hassle of many currencies, “each recognized by a small geographic segment of the European Union, and exchangeable only through banks, traveler service offices, and credit card companies for a fee.” The euro eliminates these transaction costs. “It is difficult to estimate exactly how large the euro’s transaction cost savings will ultimately

be, but for Europe, a continent in which international trade is vitally important, the savings will be substantial. One European Commission study estimates that, before the euro, European businesses converted $7.7 trillion per year from one currency to another, paying $12.8 billion in conversion charges, or 0.4 percent of European Union GDP.” Increased price transparency is a third benefit of the euro. A single currency makes price difference between goods, services, and wages in different countries more evident. Before the euro, Euroland consumers found it difficult to compare the prices of goods across national boundaries. As a result price discrimination was implemented. No longer will consumers have to think in terms of which exchange rate to apply and the transaction costs

involved in switching between currencies. The price of the good will be set in euros in all of the countries in the euro area. “This transparency will be coupled with the greater freedom of movement of goods and services within the single market an the overall effect should be to encourage competition and drive prices lower.” This will be a disadvantage to retailers who will find it increasingly difficult to differentiate prices between markets. Due to the absence of exchange rate risks, entrepreneurs feel more comfortable establishing businesses that take advantage of small differences in cross-border prices. Also, some claim that these price transparencies created by the euro will eliminate continental price differences for identical goods and services. However this is