Critically assess the economic issues raised by the Single Currency for (a) the EU as a whole and (b

... ourts, to make any law or to amend any law made. "[1] In Europe, abandoning the national currency in favour of the proposed Euro appears to many, to signify a loss of nationhood. By joining an EMU a nation will hand over its monetary policy to the ECB, and consequently loss its control over national money.

iii. It is argued that a negative effect could occur in terms of exchange rate fluctuations outside the EMU zone.

iv. There will also be change over costs, including the process to change from national currencies to one single currency which will effect both business and trade, these are essentially short term costs, but are of some significance.

v. The main cost associated with the EMU is the loss of monetary independence, and adopting to a, "one fits all" approach. Accepting a single currency requires giving up the use of the nominal exchange rates as a tool for macroeconomic adjustment and as a means of gaining competitiveness. Exchange rate adjustments can help to stabilise economies through the booms and slumps of an economic cycle, or unusual shocks, but once a, "one fits all," policy is implemented this will not be possible. Asymmetric shocks could lead to deep regional recessions and increasing unemployment, creating social burdens that is politically unacceptable to many governments. Consequently alternative mechanisms in adjusting to asymmetric shocks in EMU will need to be found. In the case of asymmetric shocks where there is a shift in demand from country A to country B, then an aggregate demand would go up in country B and down in country A. (As illustrated below)

If there is a shift in relative demand across countries, and real exchange rate does not adjust, there will be unemployment in the country where demand has been reduced unless there is migration towards the country where demand has increased. However labour movements across EC countries are very limited. And while it might be argued that labour mobility might increase as economic and monetary integration proceeds, it should be acknowledged that numerous historical, cultural and linguistic differences in ...