Monetary and Economic Integration Samples †MyAssignmenthelp.com

Question: Discuss about the Monetary and Economic Integration. Answer: Pros and cons of monetary integration Monetary integration refers to the incidence of two or more countries adopting the same or single currency without having any further integration (Hefeker, 2018). This is also known as monetary union or currency union. According to Tsoukalis (2017), monetary integrations can also lead to the existence of a fixed mutual rate of exchange for different currencies, which would be controlled by a single central bank. There are two necessary components of monetary integration. First is the exchange rate union, in which a certain section of the exchange rates bear a fixed relationship with each other while the rates vary with non-union currencies. Second is the scope of convertibility, which refers to the non-existence of all types of the exchange rate controls irrespective of the capital or current transactions within the exchange rate zone (Kruse, 2014). The most prominent example of monetary integration is the creation of EMU and Euro zone, where many independent nations of Europe have adopted a single currency Euro. The pros of monetary integration are: It reduces the transaction cost incurred by the traders and the travelers. Conversion of currencies leads to some amount of losses in terms of real value of the currencies (Hefeker, 2018). It helps in reducing the interest rates in the participating countries, and that attracts more investment. Lower transaction costs help in bringing more cross border investments. Monetary integration brings exchange rate stability and thereby reducing differences in the price across the region. Price comparison becomes more efficient and steps can be taken accordingly to reduce disparities (Nieboer, 2014). It leads to free movement of labor by ensuring a free mobility area. Common currency helps the workers to move between the countries without any regulation, which helps in reducing the unemployment. Countries get access to larger markets and thus get the scope for increasing income. The cons are: The countries lose monetary independence as they cannot take independent decision on monetary policies even during any crisis. Costs of adopting a new currency are huge, especially for a less developed country. There are negative effects of cross border fiscal policies. When the neighboring countries impose strict fiscal policies of reducing expenditure and investment, it affects the other country due to common currency (Masciandaro Romelli, 2017). Pros and cons of economic integration Economic integration is the process of elimination of reduction of the trade barriers among the economically independent nations (Moon, 2017). This type of integration aims to reduce or eliminate the barriers regarding the flow of trade in goods and services, labor and capital. It also establishes certain factors of coordination and cooperation among the participating countries. Economic integration is a dynamic procedure, which encourages the member countries to become one entity over time (Baier, Bergstrand Feng, 2014). Pros of economic integration: Facilitation of international trade by encouraging competition, comparative advantages, capital liberalization, macroeconomic stability Market liberalization through introduction of common market and common currency (Sannwald Stohler, 2015) Political liberalism through democracy and political stability Short term growth due to increased competition, optimum and efficient allocation of resources and higher real income Long term growth due to higher capital, increasing economies of scale, technological progress The cons are: Trade Blocs are often created, leading to increased trade barriers against non-member countries Trade diversion occurs where trade is diverted from a cost-efficient non-member country to cost-inefficient member country Countries lose sovereign power to a certain degree in issues like monetary, fiscal policies and trade. Higher the degree of economic integration, greater is the degree of economic control that needs to be given up to attain a stability in the political and economic system (Baier, Bergstrand Feng, 2014). Effect and stages in monetary integration leading to economic integration Monetary integration is one of the six stages of economic integration. Monetary union occurs through three stages, as in the case of EMU. In the first stage, creation of a single market is the agenda of the economic authorities. A single market ensures liberalization of capital movements across the member countries and prohibition of monetary financing of the public authorities by the central banks (Masciandaro Romelli, 2017). In the stage two, efforts are taken to achieve the convergence among the member economies in terms of public finances, exchange rates, inflation and long run rate of interests. Stage three is the final step, which introduces the common currency, that is, monetary union gets completed in stage three. In the case of EMU, 19 countries of Europe adopted Euro as their single currency with effect from January 1, 1999 (Sannwald Stohler, 2015). There are six stages in economic integration, namely, preferential trading area, free trade area, custom union, common market, economic union and political union (Schad, 2011). Monetary integration is a part of the bigger economic integration as it results in common market and economic union for the member countries. The effect of the three stages of monetary union is wide spread. Firstly, the establishment of a single market is hugely beneficial for the member countries, as that ensures reduction in trade barriers and increase in trade for the member countries. This boosts the production and trade of the countries leading to economic growth. The convergence of the policies regarding the exchange rate, inflation, public finances and long run interest rates leads to political stability of the country (Tomann, 2017). Application of monetary integration on a global scale The degree of economic integration depends heavily on the degree of monetary integration. There are many free trade areas and preferential trade areas in the world with certain terms and conditions, beneficial for the member countries, but they do not necessarily have the single currency or a fixed exchange rate among them. Lane (2006) highlights that the monetary integration results in increased amount of cross border trade in goods and services, finance and resources, increased comparative efficiency and advantage of the member countries, and helps to achieve economic as well as political stability across the region, which are the major components of economic integration. On a global scale, the biggest example of monetary integration is the establishment of EMU of Europe. It was established on 1991 with the introduction of single market, fixed exchange rate and Euro, the single currency of 19 countries of Europe. This has benefitted the economic integration of European Union in ter ms of economic and political stability, increased production and trade, increased employment and overall economic growth. References Baier, S. L., Bergstrand, J. H., Feng, M. (2014). Economic integration agreements and the margins of international trade.Journal of International Economics,93(2), 339-350. Hefeker, C. (2018).Interest groups and monetary integration: The political economy of exchange regime choice. Routledge. Kruse, D. C. (2014).Monetary integration in Western Europe: EMU, EMS and beyond. Butterworth-Heinemann. Lane, P. (2006). The Real Effects of European Monetary Union.Journal Of Economic Perspectives,20(4), 47-66. https://dx.doi.org/10.1257/jep.20.4.47 Masciandaro, D., Romelli, D. (2017). Optimal Currency Area and European Monetary Membership:Economics and Political Economy. Moon, W. (2017).Regional IntegrationEurope and Asia Compared. Taylor Francis. Nieboer, J. (2014).The Pros and Cons of Economic and Monetary Union. [online] Brugesgroup.com. Available at: https://www.brugesgroup.com/euro-and-economy/49-issues/euro-and-economy/465-the-pros-and-cons-of-economic-and-monetary-union [Accessed 23 Mar. 2018]. Sannwald, R., Stohler, J. (2015).Economic integration. Princeton University Press. Schad, M. (2011).Economic and Monetary Integration. [online] Uni-ulm.de. Available at: https://www.uni-ulm.de/fileadmin/website_uni_ulm/mawi.inst.150/lehre/ss11/isp/Economic_and_Monetary_Integration.pdf [Accessed 23 Mar. 2018]. Tomann, H. (2017).Monetary Integration in Europe: The European Monetary Union after the Financial Crisis. Springer. Tsoukalis, L. (2017).The politics andeconomics of European monetary integration. Routledge.