Title: Pros and Cons of the Euro
Headings: Pros and Cons of the Euro
Pros and Cons of the Euro
Key Takeaways
Pros
Promoting Trade
Encouraging Investment
Mutual Support
Cons
Rigid Monetary Policy
Possible Bias in Favor of Germany

Content: Encouraging Investment
The euro also supports cross-border investments within the eurozone. Investors in countries using foreign currencies face significant foreign exchange risk, which can lead to an inefficient allocation of capital. Although stocks also have exchange rate risks, the impact on bonds is far greater because of their lower volatility. The prices of most debt instruments are so stable that exchange rates influence returns far more than interest rates or credit quality. As a result, foreign currency bonds have a poor risk-return profile for most investors. Before the euro, successful companies in countries with weak currencies still had to pay high interest rates. On the other hand, less efficient firms in nations with stable currencies enjoyed relatively low interest rates. The primary risk in lending across borders was the currency risk, instead of default risk. With the euro, investors in low interest rate countries, such as Germany and the Netherlands, were able to lend money to firms in other eurozone countries without currency risk. Mutual Support
In theory, the euro should help countries that adopt it to support each other during a crisis.