This assignment will examine whether two countries can share the same currency and both prosper. In order to find out, arguments both in favour and in opposition to the research question will be discussed and evaluated. Finally, a conclusion will be drawn.
Before starting a detailed discussion, it is vital to establish precise definitions of the terms “sharing a currency” and “prosper”. For the purpose of this paper, “sharing a currency” is defined as being a member of a monetary union. According to Bergin (2008), a monetary union, also referred to as a currency union, is an association of at least two sovereign states which give up their national currencies to adopt a new shared currency. The author further states that by doing so, the member countries surrender their control over money supply as well as monetary policy to a shared authority, a new central bank. There are multiple currency unions all over the world, which is why, to apply this broad definition, this paper will use the Economic and Monetary Union (EMU) as an example.
The second important term, “prosper”, is a little more difficult to define as there is a vast number of possible prosperity indicators, such as the unemployment rate or the wage level. For the purpose of this paper, “prosperity” is defined in accordance with Fritz and Koch (2016) as the level of “economic development and material welfare”. Thus, if this level increases, prosperity in a state also does. Fritz and Koch (2016) argue that the higher the economic development in a country, the higher its individual and social prosperity. In order to gauge the level of prosperity of a state, a number of indicators are very useful.
One of the most important indicators for prosperity is the Gross Domestic Product (GDP) of a country. According to the Organisation for Economic Co-operation and Development (OECD) (Gross domestic product (GDP), 2016), the GDP indicates “the expenditure of final goods and services minus imports”. In addition to the GDP, the level of trade is an important indicator for a nation’s prosperity. As explained by the World Bank (Exports of goods and services (% of GDP), 2017), it is determined by the exports of both goods and services as a share of the respective country’s GDP.
Table of Contents
1. Introduction
2. Main discussion
3. Conclusion
Objectives and Topics
This paper examines the central research question of whether two countries can effectively share a single currency while both achieving economic prosperity. By analyzing the Economic and Monetary Union (EMU) and specifically focusing on Germany and France, the study evaluates the theoretical and empirical arguments regarding the benefits of monetary integration, such as reduced transaction costs and increased trade, against the potential drawbacks like the loss of independent monetary policy.
- Theoretical foundations of Optimum Currency Areas (OCAs)
- Impact of monetary unions on transaction costs and resource allocation
- Relationship between common currency adoption and international trade volume
- Implications of forfeiting sovereign monetary policy and flexible exchange rates
- Economic analysis of business cycle synchronization within the EMU
Excerpt from the Book
2. Main discussion
Generally, there is much debate about the advantages and disadvantages of joining a currency union. Most of them build on the most famous academic theory regarding this matter, the 1961 theory of optimum currency areas (OCAs) by Robert Mundell, for which he was awarded a Nobel Prize. His theory states that potential benefits arising from the membership in a monetary union, such as enhanced price transparency and lower transaction costs, have to outweigh potential detriments, such as giving up flexible exchange rates and sovereign monetary policy. In the following, these advantages and detriments will be discussed and evaluated.
The first argument in favour of prosperity as a result of a monetary union is the reduction of the transaction costs which arise from the exchange of currencies associated with the trade between different national currencies. This argument is brought forward by Brash (2000), Ca’Zorzi, De Santis, and Zampolli (2011) and Mundell (1961). Mundell especially stresses the importance of this argument, stating that the existence of a vast number of different national currencies results in the constant need to converse them. He believes that the high transaction costs resulting from these constant conversions of currencies essentially reduce the usefulness of money. Thus, Mundell concludes that by joining currency unions, the number of national currencies and, therefore, the transaction costs are reduced. According to the Commission of the European Communities (1990, p. 21), the savings made from lower transaction costs, in turn, reduce the “damaging impact on efficient resource allocation”.
Summary of Chapters
1. Introduction: This chapter defines the core terminology, including the concept of a monetary union and prosperity, and establishes the scope of the analysis by introducing the Economic and Monetary Union (EMU) and the case study of Germany and France.
2. Main discussion: This section evaluates the advantages of currency unions, such as reduced transaction costs and increased trade, while contrasting these with the disadvantages, specifically the loss of sovereign monetary policy and exchange rate flexibility.
3. Conclusion: The final chapter summarizes that the benefits of a monetary union, particularly regarding trade and income, outweigh the associated detriments, provided the underlying policy framework is sufficient.
Keywords
Monetary union, Currency union, Prosperity, Economic and Monetary Union, EMU, Optimum currency areas, GDP, Transaction costs, Monetary policy, Exchange rates, Trade volume, Financial integration, Business cycles, Germany, France
Frequently Asked Questions
What is the fundamental focus of this paper?
The paper examines whether sharing a common currency is compatible with the economic prosperity of two countries, using the Economic and Monetary Union as a primary case study.
What are the central themes discussed in the work?
The work explores the trade-offs of monetary integration, including reduced transaction costs, increased intra-union trade, the loss of national monetary sovereignty, and the challenges of managing asymmetric economic shocks.
What is the primary research question?
The research question asks: "Can two countries share the same currency and both prosper?"
Which scientific methods or theories are applied?
The study relies on the theoretical framework of Robert Mundell’s "Optimum Currency Areas" (OCA) and evaluates empirical evidence from various academic sources regarding trade levels and economic growth.
What specific aspects are covered in the main body?
The main body discusses the reduction of transaction costs, the "Rose effect" regarding increased trade, the benefits of financial integration, and the drawbacks of losing control over national money supply and interest rates.
Which keywords characterize the work?
Key terms include Monetary Union, Prosperity, Optimum Currency Areas, EMU, Transaction Costs, and Monetary Policy.
Why were Germany and France chosen as the specific focus?
They were selected because they are the two largest economies within the EMU, providing a significant sample for examining the economic effects of sharing a currency.
How does the author view the balance between benefits and drawbacks?
The author concludes that while there are significant challenges, the economic gains from increased trade and income generally outweigh the detriments of forfeiting national monetary policy.
Does the paper suggest that currency unions guarantee prosperity?
No, the paper clarifies that membership in a currency union is not an automatic guarantee for growth; it requires an adequate underlying policy framework to succeed.
- Citation du texte
- Sabrina Schleimer (Auteur), 2018, Can two countries share the same currency and both prosper?, Munich, GRIN Verlag, https://www.grin.com/document/437651
