Title: Single Currency: Pros a& Cons
Headings: Advantages and Disadvantages of a Single Currency.
Advantages and Disadvantages of a Single Currency.
Content: If payment were to be settled in the future, exchange rate fluctuation could either mean that the German firm pay more or less in term of Deutschmark for its Italian ordered placed in the past, say a month ago. Obviously the German firm would not like to pay more in Deutschmark a month from now for the same order. To get over this problem, the firm could "hedge" the currency, that is, it would buy from the market for the delivery of a certain amount of Italian Lire (say Lire 50 billion) for a definite price in Deutschmark. This "perfect answer" come with a "hedging costs" that the firm has to pay. A survey in Europe found that exchange rate fluctuations affected small businesses more than big multinationals. With a single currency like Euro, both our German and Italian firms can do away with exchange rate fluctuations and hedging costs. Thus, trade and investment are stimulated within this currency union. Reduced Transaction Costs. A single currency would encourage tourisms in the single currency area. A tourist to the European countries in the Euro currency area (12 of them in 2002) would not have to worry about exchanging different currencies and loss in transaction costs (commission and time) as she travel.