What would be the pros and cons or this? Also what’s you opinion on the effect of the Euro on Europe. Do you think it’s been good or bad for Europe.
When the currencies of two or more countries combine:
Pros:
- Increase in stability of currency – typically, countries that do this have volatile exchange rates that they want to control. many smaller countries have simply abandoned their currency and are using the us dollar because of the relative low volatility and high confidence in the us dollar
- Easier to maintain foreign capital reserves – lower volatility means less headaches for central banks to maintain foreign capital reserves
- Stimulates cross border capital investments and trade – let’s say you have a very stable currency. that means companies in other countries are more likely to trade with you, to lend you money, to build factories, etc. this is the single greatest reason for and benefit from the consolidation of the eu euro. from this perspective, the euro has been a great success. a good example of how wild currency movements can kill companies is the issue with many companies in asia during the asian currency crisis. many of them that had spent huge dollars buying expensive high tech manufacturing equipment from the us so that they could use this equipment to build things and sell back to the us. when the currency got crushed, suddenly they were in a position where they incurred huge debt but could not sell the finished products back to the us and europe to recoup their investment. these companies got crushed. you can hedge against currency movements, but it’s expensive, and most companies quite frankly don’t do a good job hedging, so currency volatility is a big risk these days that impedes greater trade.
- Bigger benefits for little countries or countries with volatile currency
Cons:
- Loss of autonomy for monetary policy – now, no country has the ability to just print more money or set interest rates without consulting with the other members. there is a definite incentive to beggar thy neighbor. in the euro, if germany thought interest rates should be at 4% but italy set interest rates at 0%, then italian companies would be getting a better rate and enjoy advantages to easier credit. the 0% would create an inflationary pressure that would affect all the euro countries whereas the 0% advantage would help italian companies.
overall, the euro was and will continue to be very good for trade and capital investment among the euro countries.
a merger between australia and new zealand does make as much sense because australia is so much larger an economy than new zealand. for australia, it adds hassle without much reward. for new zealand, a merger like this in practice will not be very different from simply converting to the australian dollar. if new zealand had currency problems or really wanted capital from australia, it would make sense. but since there does not appear to be any problems, they wouldn’t want to give up their control over monetary policy.
March 7th, 2010 at 1:19 am
Things are rarely good for everybody. In a merger, the weaker party usually see’s the greater benefit while the stronger party is left with the lions share of teh bill. However, it is important to remeber that if you aquire sombody it keeps them from outgrowing and competing with you while it expands your empire.
The world would be better if we where all more of one economy but the greatest nations would be financing the projects while the poorest are getting a hand out.
References :
March 7th, 2010 at 1:40 am
Having travelled in Europe recently it was a breeze using the Euro. It was so much easier. As I understand from the local people they very much prefer it. It makes price comparison easier and with open borders it is easy to buy things to best advantage. For Europe it appears much better.
Aussie NZ common currency will eliminate trade exchange of currency which might be a bummer for banks but a far better deal for manufacturers and buyers. The people on both sides of the Tasman will benefit as a cost factor will be eliminated from every deal. Whether we like it or not the majority of people in Europe and the USA treat the two countries as an entity. We therefore won’t lose identity. European countries did not lose identity when the Euro was introduced. I think it is time that we merge our currencies. I think disadvantages in a common currency will be mainly on the emotional side rather than on the economic side.
References :
March 7th, 2010 at 2:25 am
It’s a little hard to say without knowing more specifics about the New Zealand and Australian economies.
But, I can think of one plus-side. Currently, the presence of two currencies constitutes an impediment to (macro)economic efficiency. A significant amount of time, money, resources, and even labor go into helping people convert their money to Australian from New Zealand and vice versa.
If you accept that these losses are ‘wasteful’, they constitute a ‘dead-weight loss’.
So, if the currencies join together, the dead-weight loss will dematerialize.
Think of it this way… A jogger has an innate speed of 15mph. But, he is only able to move at present at a speed of 13mph because he has a heavy iron ring circling his ankle (let’s assume it’s cosmetic). But, if he can somehow take off the ring, he’ll increase his efficiency to 15mph.
If the currencies merge, they’ll increase their efficiency from 13mph (so to speak) to 15mph.
References :
March 7th, 2010 at 2:41 am
I would suggest not. One interest rate would not suit both countries, and seeing as they rarely have ideologically aligned parties in power at the same time, I suspect there would be serious conflicts.
The euro has been a disaster for Europe. The only people who benefit are those who travel a lot, and those who benefit from a fixed exchange rate for imports and exports. The ordinary man in the street, on the other hand, has been hit by huge inflation since its introduction, the wrong interest rates, increasing lack of competitiveness in the wage market etc. I believe it is very likely that the current economic climate will see a number of countries abandon the euro.
References :
March 7th, 2010 at 3:08 am
When the currencies of two or more countries combine:
Pros:
- Increase in stability of currency – typically, countries that do this have volatile exchange rates that they want to control. many smaller countries have simply abandoned their currency and are using the us dollar because of the relative low volatility and high confidence in the us dollar
- Easier to maintain foreign capital reserves – lower volatility means less headaches for central banks to maintain foreign capital reserves
- Stimulates cross border capital investments and trade – let’s say you have a very stable currency. that means companies in other countries are more likely to trade with you, to lend you money, to build factories, etc. this is the single greatest reason for and benefit from the consolidation of the eu euro. from this perspective, the euro has been a great success. a good example of how wild currency movements can kill companies is the issue with many companies in asia during the asian currency crisis. many of them that had spent huge dollars buying expensive high tech manufacturing equipment from the us so that they could use this equipment to build things and sell back to the us. when the currency got crushed, suddenly they were in a position where they incurred huge debt but could not sell the finished products back to the us and europe to recoup their investment. these companies got crushed. you can hedge against currency movements, but it’s expensive, and most companies quite frankly don’t do a good job hedging, so currency volatility is a big risk these days that impedes greater trade.
- Bigger benefits for little countries or countries with volatile currency
Cons:
- Loss of autonomy for monetary policy – now, no country has the ability to just print more money or set interest rates without consulting with the other members. there is a definite incentive to beggar thy neighbor. in the euro, if germany thought interest rates should be at 4% but italy set interest rates at 0%, then italian companies would be getting a better rate and enjoy advantages to easier credit. the 0% would create an inflationary pressure that would affect all the euro countries whereas the 0% advantage would help italian companies.
overall, the euro was and will continue to be very good for trade and capital investment among the euro countries.
a merger between australia and new zealand does make as much sense because australia is so much larger an economy than new zealand. for australia, it adds hassle without much reward. for new zealand, a merger like this in practice will not be very different from simply converting to the australian dollar. if new zealand had currency problems or really wanted capital from australia, it would make sense. but since there does not appear to be any problems, they wouldn’t want to give up their control over monetary policy.
References :