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Shall the country adopt single currency?

The Euro phenomenon is one of the greatest modern revolutions in the world of business and economics. Numerous studies and evaluation has been made to discover the real benefit and problem of a single currency. The idea of a single currency that unites the world as a single and global economy is not new. The idea generates effort of decreasing trade barriers among countries that has significant amount of cross-border activities. For instant, the NAFTA agreement was established to integrate further between nations in the North America continent.

Despite all other integration effort in the world, economists indicated that the establishment of Euro as a single currency is still the furthest step toward economic integration between nations of a region (‘The Single Currency’, 2006). Nevertheless, recent reports revealed peculiar development. The United States still revealed a stronger rate of growth compare to the Eurozone (Kohler, 2001). The issue receives considerable attention from observers, economic leaders and business practitioners.

Concerning the Euro, this paper will elaborate the dissertation proposal regarding the UK and Euro, which explains whether the country should adopts the single currency or not. Prior to the discussion, this paper will discuss the historical background of European Union (EU) and the birth of Euro. 2. Dissertations overall aims & objectives ( approximately 500words) Concerning the discussion of the adoption of Euro single currency at UK, thus replacing the UK’s Pound sterling, this paper will have three general aims and objectives as following:

1. This paper intends to elaborate the advantages and disadvantages of European Union (EU) that relates to the adoption of Euro as single currency for their members. 2. Using the non-participant observation method, collecting data and analyzing qualitative information from journal, books, magazine and other online materials, this paper aims at elaborating the adoption of single currency (Euro), which has brought results that serve as a model of future efforts of unifying national currencies. 3.

In addition, the paper aims at discussion the decision of UK in adopting the Euro as their currency and thus replacing their Pound sterling. Considering the three dissertation aims and objectives, therefore, the research statement for this paper would be: “As the adoption of Euro as single currency in some countries has provided several advantages and disadvantages to their respective economies, should UK also follow to adopt Euro as their currency based on several factors? ” I choose this research statement or question since it may be different from others who only focus on discussing the advantages and disadvantages.

Instead of discussing the partial discussion on UK’s decision on adopting Euro, this paper will also elaborate historical background of European Union (EU) that gives birth to the Euro currency and its effect To the economy of countries that already adopt the Euro as their currency to be the underlying factors suggesting whether UK should adopt Euro or not. 3. Literature review (approximately 2000 word) 3. 1 European Union: Objectives, History, and Value The European Union is considered as the form of family between European countries.

The organization aims at fostering development for member countries in order to achieve peace and prosperity. Interestingly, EU does not consider them as the ‘only’ organization to prepare member countries for international competition nor the formation of new country in the Europe. In fact, the organization is unique due to the fact member countries delegate most part of their sovereignty to the EU in order to have equal treatment across the member countries. The history of European Union (EU) commenced since the Second World War where six countries launched ideas to conduct concerted effort to prevent wars again.

The concerted agreement soon develops into the so-called European Union that now consists of 27 countries (see Figure 1) that have more than 490 millions people (European Union, 2007c). The most interesting part of EU formation is the fact that Europe is the continent that has many different cultures, tradition, and languages but share similar values; they are social justice, freedom, and democracy. Nowadays, European Union encourages member countries to work hand-in-hand in order to strengthen the spirit of openness, curiosity, and solidarity (European Union, 2007 – Panorama)

Figure 1 Member Countries of European Union Source: European Union, 2007a 3. 2 Effects of the Single Currency The single currency is one of the most notable economic revolutions in the world. The unification of coins and banknotes between countries of the Eurozone has brought results that serve as a model of future efforts of unifying national currencies. Some of the apparent effects of the Euro are: • Removal of Exchange Rate Risk Exchange risk is a notable factor that made traders reconsiders their decision to make international trade.

With the existing unified currency, the problem of exchange rate will be diminished if not erased. With a single currency, there is no need to perform complicated hedging activities when trading across national boundaries. Cross border trade will be much more appealing and the need for local currency administration within each foreign subsidiary will be obsolete. • Removal of Conversion Fees Another factor that reduces the attraction of foreign trades is the removal costs. Conversion from one currency into another using bank services will require a small amount of charge colleted by the bank.

Repeated currency transactions will cause this small charge to multiply into large amount of cost. Today, Eurozone banks have been regulated to charge the same for intra-member cross-border transactions as they charge for domestic transactions. Thus, additional costs from converting currencies do no exist anymore. • Macroeconomic Stability Prior to the single currency, the Eurozone countries often experience economic instability that resulted from the high rate of inflation. The high level of inflation is generally acknowledged as a factor that turns investors and traders away from an economy.

Thus, with the policy to monitor and manage inflation within Eurozone member countries, the application of the single currency brought macroeconomic stability to the Eurozone. • Price Differences Expert also indicated that the single currency will have a tremendously positive effect toward price parity. As we have understood, price differences (in a single price level) trigger arbitrage that leads to speculative and opportunist actions. With the existing single currency, there will be price transparency across border that helps consumers choose their products or services without difficulties.

(Baldwin, 2004) 3. 3 Major Challenges Facing the Single Currency In spite of the positive aspects mentioned above, the single currency also faces considerable challenges from several dimensions. Some of these challenges are practical or short-term in nature, while others are fundamental and have long-term effects toward the continuation of the single currency. In this section, we will elaborate the two most recognizable as well as the most fundamental challenges that faces the adoption of single currency today and in the future. 3. 3. 1 Need for Structural Reform

The Euro brought fundamental changes to the business environment of the Eurozone. Countries must make the necessary change and adaptation before they can enjoy the fruits of a controlled single currency. Currently, members of the Eurozone are continuously enhancing efforts of structural reforms to solve the problems within the single currency concept, and most of all, to obtain the benefits predicted by the leaders who designed the single currency concept. Many stated that the Euro generates more problems for some member countries more than others, especially with the existing approach of decentralization (Benson, 2002).

Using he decentralization approach, all member countries are responsible for their own institutional reforms across various sectors. However, some have also stated that such a decentralized approach should be considered as an opportunity rather than a disadvantage. The approach will encourage a ‘cross-fertilization’ of best practices through coordination between member countries. More issues regarding the need for structural reforms in various aspects will be discussed in the following sub-chapters. 3. 3. 1.

1 Coping with Intense Regional Competition Increasing competition is one of the most apparent effects of the single currency. Competitive pressures to companies increase significantly due to more transparent cross-national comparisons of prices. People who travel extensively are now aware of the price differences first and because they are comparable. In a way, it has a positive effect of pressuring domestic source of inflation and force governments to take actions that will increase their competitiveness in the future.

However, the transparent prices put a powerful pressure on prices all over the region, which means, in the short term, some region will loose its competitive edge (Lawless, 2004). 3. 3. 1. 2 Reducing Unemployment To deal with the issue of intense competition, leaders of the Eurozone countries agreed to establish a system of control that could prevent competition from creating a tremendous gap between successful and less-successful countries in the Eurozone. One of such efforts is by addressing unemployment issues within the Eurozone.

Analysts have mentioned that long-term employment problems cannot be tackled by providing subsidies or money hand-outs. In most economy, including some of the Eurozone countries, unemployment has become a ‘structural’ problem, in the sense that the roots of the problem goes deep into the economy. Such structural problem can only be solved by uncompromising commitment by governments to reform structural and regulatory underpinnings of national economies (Tricet, 2001). The solution requires a fundamental change as of most parts of the national economic system.

It is crucial to revive the appropriate economic institutions that could reduce the number of unemployment in Eurozone countries. Incentives must be directed especially to create new vacancies and to seek new projects that could bring new jobs (Issing, 2001). The structural reforms are also means to raise potential output growth of the European economy. Analysts mentioned three key activities that must be done to secure potential output growth. First is boosting investment. Because of the single currency, owners are free to invest wherever they want to.

Thus, it is crucial to create a favorable economic, legal and fiscal condition for an investment target. The more investment occurs, there will be fewer inflationary pressures and the potential output growth will be stronger (Issing, 2001). The second way of increasing potential output growth is by increasing the quantity of available labor and furthermore, enhances their productivity. This is related to efforts of decreasing unemployment rate. Other way of achieving the goal is by reducing labor cost and increasing labor quality.

The government must increase facilities of training and education. 3. 3. 1. 3 Labor Issues With the intense atmosphere of competition in the Eurozone, structural changes are also demanded in the form of altered business operations, which involve most of their components. The labor market, for instant, is very much influenced by the developing conditions. Companies in the Eurozone are now aware that they have access to all markets in the region, especially to goods and services which has lower prices than other countries.

As a result, in order to win the competition and becoming more favorable than other countries, all cost structures must be minimized, including wages. To avoid massive strikes and debacles, governments are demanded to work with their labor force and develop a partnership approach. A social partnership between employers, governments and the labor force is the favorable design to help increase the competitive edge of a nation. This is a challenge, because among other types of changes, social changes are the ones that requires considerable amount of time and hardships.

Although this calls for hard effort and periods of adaptation, I believe that people’s behavior will change once they realize the new standards that are required to face the new regime. 3. 3. 1. 4 Managing Balanced Growth An expert stated that the principal challenge that faces the single currency is the change from economic systems where all countries are separately maintaining their own survival through cooperation and competition, to a unified economic system that requires active contributions of all member countries (‘Euro Faces’, 2002). However, the system itself will not be capable of ensuring the growth of all member economies.

To some extent, the countries are left to their own abilities to survive. On the other hand, the system still requires participation of all member countries in order to remain functioning. With regard of this condition, a way to minimize gaps of growth rate between member countries is crucial. Despite the importance of competition to encourage growth, the single currency system must also be able to help those that lagged behind others. Currently, such system of control is maintained by the collaborative efforts between national central banks of member countries.

However, despite of the sound control system, observers have indicated signs of increasing gaps between Eurozone economies. 3. 3. 1. 5 Managing New Members New countries from the Central, Eastern and Southern Europe have been negotiating accession o the EU. As we have all understand, the accession requires certain economic characteristics, for instant, limitation of the gap in GDP per capita between the accession countries and the Eurozone. Despite the huge improvement achieved by the accession countries, there are still considerable problems to solve before convergence with the EU (Tricet, 2001).

Some conditions are still lagging behind requirements. One of them is the extent to which the EU and accession countries achieve sustainable convergence. The EU Treaty calls for a sufficient preliminary progress that has been made toward real and structural convergence. Another condition is the lack of a sound and effective banking and financial system. The accession countries must enhance its already progressing state of banking sector rehabilitation and foreign ownership in order to facilitate integration into the EU financial system.

The accession countries must also enhance the quality of their corporate governance, legal and supervisory frameworks, and the fight against unlawful banking practices like money laundering (Tricet, 2001). 3. 3. 2 Maintaining Financial Stability The second major challenge facing the single currency is regarding financial stability and methods to uphold the concept. The Eurosystem functions as any other modern and independent central bank. The system and the national central banks as its components have to fulfill at least two main functions, which are: to ensure price stability and preserve financial stability.

These two activities are related because price stability is the bedrock on which financial stability is built (Issing, 2001). The current development revealed the fact that the central banks still have crucial responsibilities due to their position at the center of the financial systems. Some of these responsibilities are: their role as supplier to the economy, their relationship with credit institutions, and their supervision to the banking supervision and to a safe and efficient functioning of payment systems.

Furthermore, the system of central banks must face the changes triggered by the introduction of the Euro and the current financial trends. The Eurozone countries have performed several efforts of managing financial stability while practicing the single currency. One of the most notable is the establishment of the Stability and Growth Pact (Issing, 2001). The pact is designed to assist governments to face the challenges of inflation, unemployment and unstable financial conditions.

Once the pact is fully implemented, it will discourage deviant behaviors in fiscal policy and restore government’s capability to provide automatic stabilization the overall income condition experience serious downward shift. However, the challenge lies in efforts of fully phasing-in the Stability and Growth Pact within the Eurozone economies. Another effort of ensuring financial stability is by establishing the European financial regulatory framework. The framework is the outcome of collaboration between leaders of the Eurozone countries.

For instant, the Eurosystem revealed it support over the strategic conclusions of the Committee of the European Council meeting in Stockholm on the integration of the European securities market. The implementation of the guidelines resulted from the committee meetings will help take full advantage of the introduction of the Euro. However, concerns have also been addressed toward the committee. As an example there are concerns over the possibility of abusing the financial system to finance terrorism actions. This issue and many other still pose as challenges to the committee. (Tricet, 2001)

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