Currency Union in Europe: Prospects for the UK

Currency Union in Europe: Prospects for the UK
Name
Course
Instructor
Date
Introduction to Currency Union
A currency or monetary union refers the system where two or more countries use the same currency, and this typically occurs for states that are neighbors or share similar cultural bonds. A specified geographical boundary is one of the criteria for adoption of a single area currency for much member states. A monetary union may determine the exchange rate in the defined area, but in the absence of this, many countries adopt a common currency to form a currency union. Economic integration of states facilitates the adoption of a single currency for countries, which trade together, and this may extend to formation of a custom union.
Advantages
The advantages of a Currency Union are various, with a reduction in transaction costs being one of the major reasons for the adoption of a currency union. With the adoption of a single currency, the labor costs typically reduce for member states and rlower the cost of production. In essence, wages will adjust to reflect the market conditions where an increase supply of labor would lower the cost of labor and reduce transaction costs across the specified geographical area. In any case, currency conversion is an added cost for travelers and having different currencies increases the cost of doing business.
Fluctuation in different currencies presents challenges to markets and international traders as transactions have an added risk brought about by currency fluctuation. Even though, joining a currency union would not shield traders from currency fluctuations, there is better predictability. Consequently, pegging international trade on a single currency for countries in a currency union allows traders to make strategic decisions depending on the exchange rate and the market conditions. Furthermore, the means of exchange is unified across the countries in a custom union, making it easier for traders to transact without fear of transaction risk occasioned by exchange rate fluctuations.
A currency union also ensures better predictability through using the fixed exchange rate rather than floating exchange rate. Consequently, there is less currency instability for countries under the custom union. Furthermore, a single currency would be widely used over a larger geographical area resulting in increase investor confidence in using such a currency. Additionally, there would be fewer possibilities of speculation in comparison to using different currencies, and this reduces risk in transacting using the currency. Reducing the effect of instability is also advantageous to exporters who can position their products in accordance with market operations, better than when using different currencies from countries in the same economic zone.
Disadvantages of a Currency Union
Entering currency union results to centralization of monetary policies through a central or single monetary sy...