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Why was the single currency introduced, and how successful has it been since its introduction in 1999? Free essay! Download now

Home > A Level > Economics > Why was the single currency introduced, and how successful has it been since its introduction in 1999?

Why was the single currency introduced, and how successful has it been since its introduction in 1999?

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Downloads to date: N/A | Words: 2300 | Submitted: 24-Jun-2007
Spelling accuracy: N/A | Number of pages: | Filetype: Word .doc

Description

A look at the success and failure of the single currency including many examples such as the hypocrisy of the EU over the growth and stability pact, and a look at what some of the key analysts in the field views are on this subject are such as Sandholtz etc

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The cost of EMS was also a reason for EMU, if a currency had downward pressure on its exchange rate, it would have to realign its currency through the buying of its currency of increase of interest rates. Failure to do so would result in realignment, which would cause inflationary pressures on the economy. This was of course undesirable and dangerous to those weak currencies, and the speculation of Black Wednesday, 1992 showed the pressure and fragile nature of currencies. The fixation of the currencies under EMS also provided a reason to move toward a single currency, to prevent the currency rising, as convergence and fewer realignments were necessary the longer the system lasted to provide convergence would provide inflation to the member state with a strong currency, that was not allowed to realign. In turn their exports would become less competitive, diminishing their domestic export employment rates. Finally, the power of West Germany, as the largest economy gave her considerable power not only in the setting of interest rates, but also with significant trade negotiations with the U.S. for instance, and therefore made the EMS unsustainable.

The were more political reasons for pushing ahead the EMU, in particular this came from the Soviet break up in the early 1990s, this encouraged France and other states to try to prevent a resurgent nationalistic Germany by cementing EU integration with an EMU. The success of the single market created not only a popular view of the EC in the public minds, but also made a single currency to business more attractive.

A final argument for the reason for the EMU was the international argument. With the end of communism, the dollar became the supreme currency, and the use of fluctuating the currency to benefit the U.S. domestically made a new, dominant currency, unreliant on the dollar more attractive to business and political leaders.

The single currency therefore had not just the aim of improving the economies of the member states through greater trade and business incentives that a single currency would provide, but other reasons, some political, some sovereignty, for instance over the EMS.

Initially, the Euro was introduced in 1999 for electronic transactions smoothly, in fact smoother than many predicted, however it very quickly fell against the dollar. The very big question behind the Euro of whether it was viable having so many different countries in a single currency began to be shown to be questionable. The problem of having countries like Ireland and Spain that historically have been underdeveloped, and as such were seeing rapidly rising economic growth during the 1990s and 2000s meant the danger of inflation was worrying. Had sovereignty stayed with the national banks, they would have increased interest rates to ensure a smoothing down of the economy. However, when the major economies such as Germany that has been experienced economic decline due in part to reunification, which wished to see a fall in interest rates to promote growth, the problem of inflation in regions would either have to be sacrificed or economic growth in others. Though to counteract this argument, the official EU line of the argument that there are varied micro economies in the EU is not too different from the U.K. economy, in the 1980’s, whilst the South enjoyed the benefits of the Lawson boom, the North suffered a recession due to deindustrialisation, and still does, though to a less extent today.
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