Benefits from the Euro:

Why are eleven European countries replacing their domestic currencies with a new pan-European one? What are the benefits of doing that? What are the costs?

By the act of replacing their domestic currencies with the Euro the participating European Monetary Union (EMU) countries are fixing the exchange rates of their currencies with respect to each other. Those of you familiar with developing countries can find a similar process in the dollarization (pegging, anchoring, or straight out replacement) of some economies (e.g.: Brazil, Argentina, Ecuador...)

The benefits are significant:

• Elimination of uncertainty about the future value of participating currencies. Since intra-European exports and imports account for more than 60% of total European trade the elimination of the exchange rate risk in those transactions will benefit both producers and consumers.
  
• Intra-European investment flows will not be subject to exchange rate instability either.
  
• Transaction costs for both trade and investment operations will be reduced since there will be no more bank fees for exchanging currency, no need for hedging in foreign exchange futures and options markets...
  
• Price discipline in all participating countries will improve since monetary policy will now be centralized and coordinated for the whole union. Inflation levels will be lower -on average.
  
• More stable global foreign exchange markets, that now will be able to choose between two vehicle currencies (the US Dollar and the Euro) to conduct their international transactions. It is estimated that 50% of the operations now denominated in US Dollars will be denominated in Euros after 2002.
  
• The Euro solidifies the process of European integration by requiring common monetary policies and closer cooperation on fiscal issues across borders and political divides.

Most of these gains (e.g.: the convenience of not having to constantly exchange currency while you travel across Europe) are very difficult to quantify in terms of GDP growth. My dissertation deals with these issues, exploring the connection between processes of economic integration and growth (both from the theoretical and empirical points of view.)

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