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The Euro-Area: Premature, Diminished, Divergent

In: Poland and the Eurozone

Author

Listed:
  • Mario Nuti

Abstract

The formation of a common currency area is usually expected to generate at least seven gross benefits for its members. First, a reduction of transaction costs, such as the cumulative cost of converting one currency into another (and then another). Second, an increase in competition as a result of greater transparency and comparability of prices once they are all expressed in a common currency. Third, a reduction of the rate of inflation, if the management of the common currency is subjected to greater discipline by an independent central bank targeting low inflation. Fourth, the elimination of exchange rate risk in transactions among member countries within the common currency area. Fifth, a lower interest rate associated with lower inflation and the elimination of exchange rate risk. Sixth, in addition to all these factors, trade integration within the area, the promotion of greater foreign investment, given investors’ ability to repatriate profits freely in the same currency in which they are earned. Seventh, benefits of greater financial integration, which would provide among other things a form of implicit insurance against asymmetric shocks.

Suggested Citation

  • Mario Nuti, 2014. "The Euro-Area: Premature, Diminished, Divergent," Studies in Economic Transition, in: Jens Hölscher (ed.), Poland and the Eurozone, chapter 2, pages 13-22, Palgrave Macmillan.
    • Handle: RePEc:pal:stuchp:978-1-137-42641-3_2
    DOI: 10.1057/9781137426413_2
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