The creation of euro is supposed to bring political integration and peace, bind

continent even more close together and encourage trade between the European

countries. However, Euro has brought a series of problems to countries which are

using it.

The advantages of using a single currency like Euro are as follows. Firstly, it reduced

the transaction cost, no other currency is necessary when conducting business or

travelling in the Eurozone. Businesses would no longer have to pay hedging costs

which they do today in order to insure themselves against the threat of currency

fluctuations. Businesses, involved in commercial transactions in different member

states, would no longer have to face administrative costs of accounting for the

changes of currencies, plus the time involved. The single European currency also

stimulates trade activities and free movement of capital, there would be greater

transparency and greater competition as prices are easier to compare thus trades

between countries would increase.

However, using a single currency would lead to a loss of flexibility. For instance

government’s fiscal and monetary policies are restricted because of they are using

Euro. When countries are experiencing recession, they are unable to combat

recession by loosening their fiscal stance. They would be unable to devalue to boost

exports, to borrow more to boost job creation or cut taxes when they see fit because

of the currency restriction. Secondly, the loss of national sovereignty .This means

the transfer of money and fiscal competencies from national to community level.

Economically strong and stable countries would have to co-operate in the field of

economic policy with other, weaker, countries, which are more tolerant to higher

inflation. This led to a great dispute among countries using Euro. The most recent

example is the Greece Economic Crisis. Countries are not willing to bailout in order

to help reduce Greece debt. Thirdly, all the EU countries are at different stages of

economic cycle, some are growing and some are having problems. One central bank

cannot set inflation at the appropriate level for each member state. Fifthly, fifteen

separate countries with widely differing economic performances and different

languages would be difficult to form a monetary union. This works in United States

because the labour market is mobile, helped by the common language across a large

geographical area. However, European countries speak different languages and this

would be a huge barrier to labour force mobility.

On the other hand, it also causes asymmetric shock. When something unexpected

happens that affects one economy more than the rest. This can create big problems

for policymakers if they are trying to set a macroeconomic policy that works for

both the area affected by the shock and the unaffected area. For instance, optimal

currency areas are unwilling to help the weaker countries.