The Euro: Advantages and Disadvantages Of A Single Currency
Every national currency around the globe is subject to identical market laws and its value changes according to the same factors that influence all other currencies. Within the Eurozone, all countries share the same currency - the euro, and are less affected by changes in the euro exchange rate. There are many advantages of the euro adoption by the countries in the Eurozone, despite that disadvantages also exist, and the most well known are the following:
- obliteration of the existing exchange rate fluctuations between a number of currencies and reduction of transaction costs (no other currency is necessary when conducting business or travelling in the Eurozone).
- The single European currency also stimulates trade activities and free movement of capital, goods and people but these effects should be subject to a profound academic research.
- Previously, the national economies of the European Union member states sometimes suffered from fluctuations of the local currencies within a common market. The euro exchange rate does not offer shelter from currency fluctuations in general, however, it provides predictability and unifies the means of exchange in all countries in the Eurozone.
Following the adoption of the euro, 12 countries in the EU witnessed their national currency disappear with more new member states entering the Eurozone gradually and other waiting at the door. Thus, all current members of the Eurozone take advantage of the single currency but they share the same disadvantages as well.
When the U.S. Federal Reserve releases data showing increasing unemployment rate, falling number of new mortgages and a growing number of businesses going bankrupt the most immediate consequence will be a falling exchange rate of the U.S. dollar. The same applies to the single European currency, but in addition to the data released by the European Central Bank, Forex traders around the globe take decisions whether to buy or not to buy euro depending on data about the national economies of the countries participating in the Eurozone. Hence, negative signals reported by the French or German economy could result in depreciation of the euro exchange rate as a whole despite that the economies of all other Eurozone member states are running smoothly.
From the average customers’ point of view, the single euro exchange rate is a good thing, though. There is no need to exchange your money into a new currency every time you cross a border within the Eurozone. The euro also facilitates the currency transfers within and outside the EU and reduces the costs of such transfers. As a rule, the risks of a currency collapse cannot be eliminated but the safety provided by the euro is good enough to reduce such risks to a minimum and to maintain largely predictable euro exchange rate.