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Answer to question 4 Continued.
It is sometimes said that the Euro will make it easier for companies to compete in the European market, that it will drive down the costs of doing business in Europe and will eliminate exchange rate uncertainty- all this because prices will all be set in the same currency across the continent. There is some truth in this- noone is denying that there are any benefits from currency integration; after all we have a single currency in the UK and so do other countries, basically because it saves us all costs of this sort. But we are also realistic about these costs; they are not for example so large as to justify a world single currency. As we have seen there are great problems in setting a single interest rate for a large number of regions in the absence of other adjustment mechanisms. The question is how large is the reduction in business costs we could expect to set against these problems?

The answer, on the basis of many studies- many of them carried out by the EU Commission itself-, seems to be that these reductions are really pretty small at this stage of Europe's integration. For example, the reduced cost of changing money might save 0.1% of national income for a big mature country like the UK or Germany- the reason it is so small is that most currencies are exchanged through banks via computer and the extra key strokes for currency conversion cost nothing! There is no evidence of any savings on competition- indeed almost all studies have found that trade is essentially immune to exchange rate volatility, presumably because companies can protect themselves against it through the markets. As for exchange rate uncertainty itself, one must be careful; there is obviously elimination of uncertainty between euro currencies themselves but this can well increase uncertainty between euro currencies and others, especially like the dollar. This is particularly the case for the UK; because of our close ties with the USA the pound moves fairly closely with the dollar when it is free to move on its own. When it was tied to the DM through the Exchange Rate Mechanism in 1990-92 it was forced to move violently against the dollar with great difficulties for our trade.

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(question 5)
© Patrick Minford 2002