Research Articles Base: Monetary Union

Benefits of a Monetary Union in the European Union

1. Discuss the main benefits one might expect to accrue from monetary union in Europe.               Monetary union commenced in 1999 with the circulation of the euro as the common currency of eleven of the fifteen European Union states with the other states joining the monetary union in the succeeding years. The basis of the monetary union is the Maastricht Treaty in 1993 that created the European Union and paved the way for the development of the euro. The monetary union means the use of a single currency by the 300 million citizens of the participating economies. (Salvatore 2002a; Leblond 2004) This constitutes a radical change in economic and political infrastructures within the participating economies. The radical change required as well as the long-term onset of results mean the emergence of risks and apprehensions over potential outcomes. However, the decision to engage in the monetary union by eleven countries also forming the European Union means that the expected benefits outweigh the drawbacks. Various adjustments are required of the participating economies including the transfer of a certain degree of sovereignty and change in economic and political infrastructures. The introduction of the monetary union in Europe should give rise to a number of main benefits characterized into economic and political benefits.             The economic benefits revolve around market integration, foreign exchange stability, and trade competitiveness.             First benefit is the creation of a single market that pools the economic strengths of the different economies into a single large market relative to other markets. This means the necessary pooling and even sharing of resources and infrastructures to integrate these in forming a single market for the member countries. This involves mutual benefit for the member countries not only for the weaker and poorer economies but also for the stronger and richer economies. The weaker economies benefit from infrastructure and resource support from the richer countries. (Eudey 1998; Leblond 2004; Vujic 2004) An example is the strengthening of the banking system under the regulation of the European Central Bank. This means that the banking system in the different economies have to conform to a single standard that not only facilitates inter-linkages but also efficiency in operations. This leads to the strengthening of the overall banking system within the European Union to make the banking and finance industry more competitive against the banking systems in East Asia and North America. (Salvatore 2002b) Another example is the pooling of the labor market across the different European Union economies that ushers the redistribution of the labor force from one economy to another as needed.             Second benefit is the sharing and minimization of economic risks. With a single currency, the different member countries do not have to contend with the economic risks arising from foreign exchange or money market and trade relations involving different competing currencies. A single currency removes foreign exchange competition that results to some currencies at a loss and other currencies at the top. By implementing a monetary union through the euro, the only concern of the economies is the performance of the euro relative to other currencies such as the US dollar. Exchange rate volatility is addressed. As such, instead of each economy addressing foreign exchange volatility, the entire monetary union having euro as the single currency only have to deal with other strong performing currencies such as the US dollar and Yen. In effect, volatility in exchange rate is minimized. The effect on the different economies becomes uniform because of the common effect of the performance of the euro to these economies. (Eudey 1998)             As such, the monetary union shares or spreads risk among the different European Union countries instead of just segregating the stronger economies from the weaker economies. The effect on businesses engaging in trade is also positive since minimal risks supports greater engagement in import and exports across the economies participating in the European Union. The only risk concern of importers and exporters in European countries participating in the monetary union is the volatility of the euro relative to other strong currencies. Although the economies have to contend with international business risk, the minimal risk involved in trading within the monetary union benefits the EU economies.             Third benefit relates to the benefit for minimized currency risk is the minimization of speculation and competitive devaluation. Speculation is a common occurrence in Europe prior to monetary union. Speculation involves the vigilance of the different economies in monitoring changes in the value of various currencies in the region as a signal in making decisions in the money market. When the value of a currency is expected to drop because of factors such as political unrest or economic problems, the other economic would sell that currency to prevent incurring losses. This act creates a wave effect by constituting a signal for other countries resulting to the widespread selling of the foreign currency that further affects the value of that currency. The response to speculation is the raising of interest rates to prevent the massive selling of currency based on the signals and movements of other economies. However, interest rates constitute a hindrance to economic growth in Europe because of its restrictive effect on the financing of business or industry expansion. In eliminating speculation, growth is easier to achieve in economies participating in the monetary union. With the introduction of a single currency, speculation across the different economies is no longer needed resulting to an environment more conducive for economic trade because of the minimal risks as well as informed business operations since it is easier to read market trends across the European Union with the operation of a single currency. (Eudey 1998; Vujic 2004)             Competitive devaluation pertains to the control of the value of its currency by economies to support trade goals. Some economies deliberately and artificially lower the value of their currencies to boost imports. The response could be the decrease in the value of other currencies. When this happens, a barrage of currency devaluation occurs and inflation happens. By introducing a single currency, inflation rates are kept at low levels resulting to the lack of need to devalue the currency. Moreover, the single currency means there will be no different currencies to devalue. In case of the need to devalue the euro, this would be relative to other currencies in compliance with the monetary policy of the country. (Eudey 1998; Vujic 2004)             Fourth benefit is ensuring price stability across the country members of the European Union. Price stability means the implementation of a uniform inflation rate less than two percent for the entire European Union area. To have a uniform annual inflation rate, the euro as the single currency for the member countries of the European Union emerged. (Eudey 1998) Price stability develops since the European Union economies use the same currency and price adjustments depend on changes in supply and demand functions across the entire European Union instead of considering signals from the relative supply and demand of each European country. When price adjusts to changes in a large single market, the effects of the movements in the supply and demand function is less when absorbed by the wide economic security net across the European Union economies.             Fifth benefit is the cost savings from the elimination of the need for switching currencies with other European countries. Prior to the monetary union, each European country needs to deal with foreign exchange reserves and implement monetary policy based on the relative performance of its currency. The rule of foreign exchange provides the need to exchange currencies needed in stabilizing the value of one currency over another and in trading. Savings from eliminating the need to exchange currencies adds up to thirty billion dollars every year on the part of business firms engaging in exports and imports with other European Union and non-European Union countries. The savings is due to the lesser transaction costs needed in implementing a single currency for the different European economies. With a decline in transaction costs resulting to savings, the economies participating in the monetary union have resources for allocation to the expansion of business activities. (Salvatore 2002a)                           Sixth benefit is greater bargaining power of the monetary union in international trade and relations. Economies engage in free trade agreements with other economies to facilitate efficient trade relations. The success of finalizing a trade agreement that is beneficial to the participating countries in the monetary union depends on their bargaining power, which is turn based on their traded commodities and monetary strength. With a monetary union that operates through the euro by all the member countries, the supranational body governing the monetary union has greater bargaining power to engage in beneficial free trade agreements with economies in the different regions. As an example, the monetary union established free trade agreements with four countries in Latin America to support closer trade relations. The monetary union achieved greater bargaining power because of its positively performing and stable currency that means lesser risk for its trading partners because of the lower volatility level of the euro. Concurrently, the monetary union also offers larger capital investments through the aggregate trading capabilities of the participating countries. In addition, the monetary union also achieves better terms in the free trade agreement by being able to engage in different agreements with key countries that represent a potential market as well as source of raw materials and resources. Beneficial trade agreements spur further growth in the participating economies by providing opportunities for investment and market expansion. (Eudey 1998)             Political benefits revolve around improvements in political infrastructure that support economic growth. The overall benefit is political stability across the different countries participating in the monetary union. The implementation of a monetary union means the necessity of relinquishing a certain degree of sovereignty by the participating countries and transferring these to the supranational institution. By transferring a certain level of sovereignty to a governing institution covering the member countries, this represents the integration of political aspirations as well as the demonstration of harmony in terms of policies and preferences. The monetary union contributes to political stability by providing a common policy framework for all the participating countries representing their common aspirations and goals. (Eudey 1998)              Political stability in turn benefits the participating countries in terms of effective political institutions supporting business expansion and economic growth. The monetary union implies the development of fiscal and monetary policies that reflect the common aspirations of the participating countries of enhancing the competitiveness of industries to compete internationally.              The benefits from the establishment of the monetary union have economic and political dimensions. Political benefits revolve around political stability and enhancement of political infrastructures across the participating countries reflecting the common aspiration of these countries. Uniformity based on standards set by the monetary union means improvement in the political infrastructures of the weaker economies to spur collective political development. Economic benefits revolve around the minimization of risks and uncertainty in foreign exchange and trade and fostering of economic growth.   References Eudey, G., 1998. Why is Europe forming a monetary union. Federal Reserve Bank of Philadelphia Business Review, 1998, pp. 13-21.   Leblond, P., 2004. Completing the Maastricht contract: Institutional handicraft and the transition to European Monetary Union. Journal of Common Market Studies, 42(3), pp. 553-572.   Salvatore, D., 2002a. The Euro: Expectations and performance. Eastern Economic Journal, 28(1), pp. 121-136.   Salvatore, D., 2002b. The Euro, the European Central Bank, and the International Monetary System. Annals of the American Academy of Political and Social Science, 579(1), pp. 153-167.   Vujic, B., 2004. Euro adoption: Views from the third row. Comparative Economic Studies, 46(1), pp. 159-176.     Credit:ivythesis.typepad.com

Benefits of a Monetary Union in the European Union

1. Discuss the main benefits one might expect to accrue from monetary union in Europe. Monetary union commenced in 1999 with...

ECONOMIC AND MONETARY UNION

Economic and Monetary Union             Economic and monetary union is a single market with a common currency (). It is to be distinguished from mere currency union which does not involve a single market. This the fifth stage of market integration. EMU is established through a currency-related trade pact.             In economics, a monetary union is a situation where several countries have agreed to share a single currency among them (). The European economic and monetary union, for example, consists of three coordinating economic policy and culminating with adoption of the euro, EU’s single currency.             According to (1998), European economic and monetary union means one monetary policy, interest rate and central bank (ECB). It also involves a fixed relationship between the currency units of participating member states their replacement by a single currency, prior to the euro. The objective of EMU is to move forward beyond the regime of relatively fixed but adjustable exchange rates established in 1979 under the aegis of the European Monetary System (EMS). This zone of relative monetary stability would be converted into complete monetary union through the single currency.             The most obvious advantage concerns the elimination of the transaction costs involved in changing EU currencies, both for the traveling public but more significantly for trading purposes. The European Commission estimated that savings could amount to 0.4% of total EU GDP per year, which could provide a significant stimulus to competition and saving for European consumers over a long period of time (, 1990).There would also be elimination of currency risks with a resulting increase of trade and investment between states. Interest rates would fall so that investment and growth would increase. In addition, the Union would be an area of low inflation and inflationary wage expectations would be reduced. It would also be easy for the companies to compare prices with their competitors which may encourage competition and may result in lower prices for consumers. Using single currency will stimulate economic growth and may reduce unemployment rates in the participating member states.             However, with this union the member states would likely to face some costs and risks. According to  (1998), the principal cost is the sacrifice of an independent monetary and exchange rate policy in circumstances where national fiscal policy to counteract the effects of unexpected economic shocks might be very severely constrained, where no contra-cyclical Community budget exists and where, moreover, in Continental Europe labor markets are notoriously sclerotic, with very little labor mobility between regions and across frontiers in response to job opportunities.             In addition, countries have different economic cycles in which a single monetary policy cannot be appropriate for all of them simultaneously. Monetary union which promotes common monetary and fiscal policies will remove an important source of differences in their economic policies at the expense of prolonged unemployment in some countries if the monetary union coverage does not correspond to optimum currency area.              Further concern is whether the monetary and fiscal policies of the monetary union will be sufficiently flexible to cope with economic shocks especially recessions.             Moreover, concerns also centered around loss of national sovereignty for each of the participating states. Participating states may not be able to pull out a national economic crisis without the ability to devalue its national currency and encourage exports. Another is that participating states will be forces to give tax breaks to compete with each other and those companies may lower wages for their employees and to lower prices on goods that they produce. Other countries fear that joining EMU may pull their country down to the economic equivalent of the least common denominator saddling them with the economic problems of countries with less successful economy.             Twelve member states of the European Union have entered the third stage and have adopted the euros as their currency. However, the United Kingdom and Denmark have exempted themselves from the transition to the third stage of EMU.             According to  (1998), no previous UK government had much positive to say about Europe for many years and there is a largely hostile press. A large percentage of the population is anti-EMU and there is only a small margin in favor of continued EC membership. The debate on EMU has to be considered, against the effects on the City, on inward investment, the competitiveness of the UK economy, the volubility and over-valuation of sterling and the fact that the UK trade cycle is currently different from most of Continental Europe.             In addition, the fiscal–monetary mix also has to be weighed, bearing in mind that fiscal policy is a question of political judgment whereas monetary policy is broadly not political but governed by economic circumstances. Staying out would not be a soft option because of the need to maintain low inflation, fiscal prudence and the need to avoid accusations of competitive devaluation. Finally the question of UK relations with the European Union more generally is of great importance.             When other countries have been clamoring to be part of the euro, Britain has been reluctant.  (2002) judge the British reason through the study of lessons of history and how the British experience differs from that of most other countries in Europe since, for good or ill. According to (200), most European countries, large or small, have repeatedly had to carry out changes which have drastically altered their internal currencies. However, the pound of Britain as a unit of account has never had to be replaced by a “new pound” or any other designation in 1,300 years, in contrast to the French franc or the various German currencies such as the Reichsmark, Rentenmark, Ostmark and Deutschemark, to mention merely some of the more modern changes.             With Britain’s head start in the Industrial Revolution, developments in banking, her victory over her most powerful rival in the Napoleonic Wars, and the spread of the British Empire during the 19th century, the pound sterling became the world’s most important currency (, 2002). England has enjoyed a relatively stable single national currency with an unbroken history of over 900 years, and the origins of the pound Sterling go back even further still.             In addition, A range of studies by the National Institute suggests that a part of the foreign investment in Britain appears to take place because Britain offers a gateway to the European Union. If the United Kingdom remains outside the monetary union, then other countries are likely to offer a more attractive gateway. The profitability of foreign investment in Britain will be affected by changes to the value of the euro altering costs set in sterling relative to sales prices fixed in euros; this may deter foreign investment in Britain.             Moreover, a recent study from the National Institute (, 2000) suggests that, inside the monetary union, Britain will face an inflation rate which is less volatile and a level of output which is more volatile than those we have at present. We expect such circumstances to be more favorable for firms investing in the UK because inflation volatility leads to prices becoming increasingly uncertain in the indefinite future while output uncertainty has only short-term effects.             The present position of the UK could look like the reflection of a rational decision to ‘wait and see’. By not joining immediately the UK has the opportunity to learn from the experience of others and to assure itself on aspects of the Euro-zone construction about which there are or were legitimate doubts. UK by standing outside might hope to learn something useful which is probably reassuring, even if the time elapsed so far is comparatively short.             Moreover, the cost of monetary union for the UK is high. A British government survey, conducted in 1998, revealed that 95% of small and medium-sized enterprises, defined as those employing less than 250 employees, had at that time made no preparations for the impact of the euro and that 65% considered that none were necessary (, 2000).             The UK, with a higher proportion of trade outside the euro zone, will gain less than most other potential participants. Moreover, whilst transaction costs may be a relatively onerous burden for small exporting companies, their larger competitors typically face costs as low as 0.05% for transactions exceeding million (., 1997).             The impact of currency conversion will be restricted to UK exports were the UK to remain independent of EMU. However, membership would require the transformation of all prices currently represented in sterling into euros, and therefore imply similar changes to many domestic products in terms of marketing, size or quality of the product.             Negative features arising from the introduction of the single currency include transition costs. This includes consumer psychological adjustment to a new monetary value system. However, the adjustment costs for business are likely to be considerably larger. These include the changeover in record and accounting systems, requiring the adaptation of computerized systems and the need to open euro bank accounts, coupled to a temporary need for dual pricing.             The European Banking Federation calculated that the EU banking sector is required to spend between 6.3 (pounds sterling) and 7.9 billion (pounds sterling) over a three-to four-year period (, 1995). This amounts to 2% of operating costs for each changeover year, a sum exceeding 900 (pounds sterling) million per annum for the UK banking sector. The British Retail Consortium has estimated the cost of currency changeover to be approximately 3.5 billion [pounds sterling], 17% of this resulting from six months of dual labeling of all products after the introduction of the single currency (, 1998).             Generally, UK has not joined the monetary union for the reason of high transition costs that would be incurred and it would mean that they would be dependent on the EMU in monetary needs of the country.                               References Credit:ivythesis.typepad.com

ECONOMIC AND MONETARY UNION

Economic and Monetary Union Economic and monetary union is a single market with a common currency (). It is to be distinguis...

Essay

Essay     In economics, a monetary union is a situation where several countries have agreed to share a single currency among them. In the strictest sense of the term, monetary union means complete abandonment of separate national currencies and full centralization of monetary authority in a single joint institution. In political terms, monetary unions divide into two categories, depending on whether national monetary sovereignty is shared or surrendered. Unions based on a joint currency or an exchange-rate union in effect pool monetary authority to some degree. They are a form of partnership or alliance of nominal equals.   European Economic and Monetary Union is one of the well-known examples of this, in which 12 member states of the European Union have replaced their individual currencies with a common currency, the euro. The 12 members were Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Nethlerlands, Portugal, and Spain. European Monetary System (EMS) was the arrangement established in 1979 where most nations of the European Economic Community (EEC) linked their currencies to prevent large fluctuations relative to one another. This originated in an attempt to stabilize inflation and stop large exchange-rate fluctuations between European countries. It is an agreement by participating European Union member countries that includes protocols for the pooling of currency reserves and the introduction of a common currency. U.K. is not a member of European Monetary Union. Would it be better for UK to join the monetary union of the European countries or not?  Membership of EMU would mean that UK should adopt the euro as its currency and UK interest rates would be set by the European Central Bank on the basis of economic condition as a whole. What are the advantages and disadvantages that should be considered by U.K. in joining the European Monetary Union? The greatest advantage of a monetary union is that it reduces transactions costs as compared with a collection of separate national currencies. With a single money or equivalent, there is no need to incur the expense of currency conversion or hedging against exchange risk in transactions among the partners or to insure themselves against the threat of currency fluctuations. Businesses would no longer have to face the cost of accounting in different currencies.  With single currency, there is no need for UK to change money into foreign currencies. This would save time and money. Tourists and businesses would be benefited. With this, volume of trade among participating countries would increase. Lower transaction cost would also induce in the increase of specialization. This would increase efficiency in production because of increased specialization and economies of scale.  Small firms would stand the most to gain because currently the currency cost of exports is ten times higher for small companies than for multi-nationals. Another advantage is that there would be cheaper mortgages and lower interest rates.  A single currency should also result in lower interest rates as European Central Bank takes on the monetary credibility of Germany’s Bundesbank. This should lead to more investment, more jobs, lower interest rates and for home owners to lower mortgages. Furthermore, tourism would be promoted because tourists will no longer be forced to change money and pay back the commission charges. Tourists would not have to change money when traveling within the euro zone and would encounter less red tape when transferring large sums of money across borders. For instance a customer would have wished to make a large purchase across European border such as buying a car or a house, a single currency would make the transaction easy. Another advantage of a single currency is stability of currency of the participating countries because the euro would have the enhanced credibility of being used in large currency zone. It would be more stable against speculation than individual currencies right now.  This would end internal currency instability and reduction of external instability would enable exporters to project future markets with greater certainty. This would unleash great potential growth. Single currency also would reduce exchange rate uncertainty. International trade becomes easier because exchange rates can’t affect prices. More foreign businesses and more investment may choose to set up in UK and would reduce the cost of national debt service, ultimately increasing national income It would also mean fiscal sustainability and more flexible labor markets. The single currency will be a catalyst for enormous structural change and should make a much more competitive trading area. It increases the transparency of market which makes it easier to benefit from economies of scale. In addition, it encourages competition in most product markets. The subsequent enhancement of competition will increase economic efficiency and should cause price convergence, thus ending any market discrimination. With market transparency, this would also mean price transparency in an integrated market and end of market segregation. It would be easier to compare prices in different countries because all figures are quoted in Euro’s. Further advantages as regards to single currency is that free trade would emerge. Monetary union will give the UK increased bargaining power in such negotiations because a common position could be put forward. A single currency leads agents to modify their wage and price setting in a more disciplined way. This would increase business confidence, investment and the rate of economic growth in the community. Monetary union also could provide stability for internal and international trade, it disallows predatory speculation on a national currency, and it disallows one nation from artificially manipulating its currency for unfair trade advantage. This would bring about price stability over a large area which will be an important condition for sustainable, real growth in income and employment. But in contrast, there are also serious problems that would emerge with this single currency policy because to bind countries together with single monetary currency in a straight-jacket without political unity might lead to a situation where individual national leaders will blame their economic and financial problems on the monetary straight-jacket upon them. For instance, Spanish leaders will claim that unemployment is so high because European Central Bank’s monetary policy is too tight or Germany’s leaders will blame the central bank for too high inflation rate. This might lead to monetary, economic, and political chaos. In addition, this monetary policy also might not be suited with the economy of all countries. Some European Union (EU) countries may find that they are unable to combat recession by loosening their fiscal stand. Members would be unable to devalue in order to boost exports, to borrow more to boost job creation or to cut taxes when they see fit because of the public deficit criterion. Another disadvantage is the differing of economic cycles because all EU countries have different economic cycles or of different stages between boom and recession. Single currency may abolish the policy option to set interest rates separately at the level appropriate for each country. Problems would also emerge when economies with different fundamental economic structures, levels of efficiency, productivity and inflation are integrated under a single currency. Furthermore, language in Europe is a huge barrier to labor force mobility and monetary union is only possible if the whole area covered by the single currency has the same legal framework such as taxation, labor laws, etc.  Another disadvantage is that introducing single currency is costly because there are some changes which include educating customers, changing labels, training staff, changing computer software and adjusting tills which should be implemented. Moreover, the most often mentioned disadvantage of monetary union is the loss of national sovereignty. The participating countries would no longer be able to pursue independent monetary and fiscal policies. Monetary policy will be under the control of European Central Bank and government would lose the option of devaluation. In the event of asymmetric shock that puts the economy in recession, the government would be very limited in its policy response options in EMU. It could not devalue to restore competitiveness or decrease interest rates, and fiscal policy is also likely to be severely restricted. Basically the government would only be left with microeconomic options to boost the economy which may help to increase employment and output in the long run but would do little in the short run during a recession. The transfer of money and fiscal competencies from national to community level would mean economically strong and stable countries would have to cooperate in the field of economic policy with other, weaker, countries, which are more tolerant to higher inflation. The introduction of a single currency could eventually lead to the end of nation state. Individual partners lose control of both the money supply and exchange rate as policy instruments to cope with domestic or external disturbances. Against a monetary union’s efficiency gains at the microeconomic level, governments must compare the cost of sacrificing autonomy of monetary policy at the macroeconomic level. Individual countries lose the capacity derived from an exclusive national currency to augment public spending at will via money creation. Technically defined as the excess of the nominal value of a currency over its cost of production or an alternative source of revenue for the state beyond what can be raised by taxes or by borrowing from financial markets.  But the seriousness of these disadvantages will depend on the type of monetary union adopted. In an alliance-type union, where authority is not surrendered but pooled, monetary control is delegated to the union’s joint institution, to be shared and in some manner collectively managed by all the countries involved. Hence each partner’s loss is simultaneously also each other’s gain. Although individual states may no longer have much latitude to act unilaterally and may lose control of the money supply and exchange rate, each government retains a voice in decision-making for the group as a whole.  Monetary Union has its advantages and disadvantages. So, should UK join the European Monetary Union or not?  As mentioned, monetary union reduces transaction cost because there is no need to money currencies in transactions made outside country, reduces exchange rate uncertainty, would result to stability of currency, fiscal sustainability and cheaper mortgages and lower interest rates. But in contrast, there are also disadvantages because monetary union would only be successful if all participating countries are of the same political, monetary, and economic status. There would also a loss of sovereignty. It is also costly due to some changes which should be implemented and the language barrier among the participating countries. For the UK to join the European Monetary Union, they should consider these advantages and disadvantages.    Credit:ivythesis.typepad.com

Essay

Essay In economics, a monetary union is a situation where several countries have agreed to share a single currency among them. In ...

What are the main objectives of IMF and to what extent are these objectives being achieved

What are the main objectives of IMF and to what extent are these objectives being achieved “After the First World War, most of the countries of the world were of the opinion that monetary cooperation was necessary to get the economic stability at international level. But the world wide depression in 1930 and the fall of gold standard system in 1931 gave rise to a number of problems in exchange rates; The second world war also became the reason of cancellation of a trade pact among powerful countries (America, England and France). Due to the multiple exchange rate practices, difficulties arose in international trade and it was felt that without monetary cooperation, economic development was not possible, A well known British Economist, John Maynard Keynes and the American expert Harry D. White prepared their separate plans for International Clearing Union and ‘United and Associated Nations Stabilization Fund’ respectively. “(International Monetary Fund-Objectives, Functions and Role.  http://www.bestarticleworld.com/2009/11/international-monetary-fund-objectives.html, retrieved 13 April, 2011.)” The International Monetary Fund (IMF) was initiated in July 1944 with 45 members and was put to action in December 1945 when 29 countries signed the agreement.  The goal of the IMF is to stabilize exchange rates and assist the reconstruction of the world’s international payment system.  The IMF also works to help improve the economies of its member nations.  The headquarters of the IMF is located in Washington DC, USA. “The primary mission of the IMF is to provide financial assistance to countries that experience serious financial and economic difficulties using funds deposited with the IMF from the institution’s 187 member countries. Member states with balance of payments problems, which often arise from these difficulties, may request loans to help fill gaps between what countries earn and/or are able to borrow from other official lenders and what countries must spend to operate, including covering the cost of importing basic goods and services. In return, countries are usually required to launch certain reforms, which have often been dubbed the “Washington Consensus“. These reforms are thought to be beneficial to countries with fixed exchange rate policies that may engage in fiscal, monetary, and political practices which may lead to the crisis itself. For example, nations with severe budget deficits, rampant inflation, strict price controls, or significantly over-valued or under-valued currencies run the risk of facing balance of payment crises. Thus, the structural adjustment programs are at least ostensibly intended to ensure that the IMF is actually helping to prevent financial crises rather than merely funding financial recklessness.” (International Monetary Fund.  http://en.wikipedia.org/wiki/International_Monetary_Fund, retrieved 13 April, 2011.) To achieve its objectives, the IMF depends largely on its interactions with its member nations.  These interactions include exchanges of information, analysis, and views between IMF officials and country authorities, or other people or entities in member countries.  In December 14, 2009, the IMF released the minutes of their Executive Board Meeting 09/124.  The IMF Directors cited that their member nations rated the Fund’s overall effectiveness positively.  “However, they expressed concerns about the indications of a lack of agreement between the Fund and the large advanced and large emerging countries respectively on the scope of interactions, and of widely varying effectiveness in the areas where the Fund was supposed to excel.  Directors observed that the report covers principally the pre-crisis period, and significant progress has been made on several fronts since then.  Nonetheless, several of the report’s key findings remain a source of concern.  If the Fund is to effectively respond to the new opportunities and challenges it confronts, careful consideration needs to be given to the IEO’s findings and recommendations, together with other possible areas for enhancement, acknowledging the complexity of interactions with Fund members.  (The Acting Chair’s Summing Up IEO Evaluation of IMF Interactions with Member Countries Executive Board Meeting 09/123 December 14, 2009.  https://docs.google.com/viewer?url=http%3A%2F%2Fwww.ieo-imf.org%2Feval%2Fcomplete%2Fpdf%2F01202010%2FIMC_Acting_Chairs_Summing_Up.pdf, retrieved 13 April, 2011.)” In the IEO’s Press Release for 9 February 2011, “The IEO found that the IMF’s ability to identify the mounting risks was hindered by a number of factors, including a high degree of groupthink; intellectual capture; and a general mindset that a major financial crisis in large advanced economies was unlikely.  Weak internal governance and an institutional culture that discourages contrarian views also played an important role. The IMF has already taken some steps to enhance surveillance.  However additional changes are needed to reform the IMF’s culture, governance and practices, so that the IMF is better prepared to confront future challenges.  While the IEO report focuses on financial sector issues because of the nature of the recent crisis, most of the recommendations deal with institutional changes that would improve the IMF’s capacity to detect other types of risks and vulnerabilities that could be at the center of a future crisis.  The IMF must clarify the roles and responsibilities of the Executive Board, Management, and senior staff and establish a clear accountability framework as well as cultivate a culture which is proactive in crisis prevention.  The IEO also stressed the need to modify institutional structures and incentives to foster better assessment of risks, internal collaboration, candor and clarity in messages, and the ability to “speak truth to power.” (IEO Releases Evaluation of IMF Performance in the Run-Up to the Financial and Economic Crisis:  IMF Surveillance in 2004-2007.  https://docs.google.com/viewer?url=http%3A%2F%2Fwww.ieo-imf.org%2Feval%2Fcomplete%2Fpdf%2F01102011%2FCrisis_PRESS_RELEASE.PDF, retrieved 13 April, 2011.)”   Credit:ivythesis.typepad.com

What are the main objectives of IMF and to what extent are these objectives being achieved

W hat are the main objectives of IMF and to what extent are these objectives being achieved “After the First World War, most of the co...

What are the main objectives of IMF and to what extent are these objectives being achieved

What are the main objectives of IMF and to what extent are these objectives being achieved

W hat are the main objectives of IMF and to what extent are these objectives being achieved “After the First World War, most of the co...

THE EFFECTS OF THE REDENOMINATION OF THE GHANAIAN CEDI ON THE ECONOMY OF GHANA

THE EFFECTS OF THE REDENOMINATION OF THE GHANAIAN CEDI ON THE ECONOMY OF GHANA             Redenomination has its advantages and disadvantages for the Ghanaian currency and its people but it does not have a significant impact on the economy of Ghana and in any economy for that matter. The advantages of redenomination are multiple and worth discussing as it somehow create the illusion that it impacts the economy in a positive way. Redenomination stabilizes foreign exchange of Ghanaian cedi vis a vis the US Dollars. In 1982 foreign exchange value of the old Ghanaian cedi was 2.78 to 1 US dollar, in 2007 Ghanaian Cedi to US dollars plummeted to 9,100 Cedis to 1 US dollar. The implementation of the redenomination will reduce the foreign exchange value to several zeroes. (Mansah, 2007). Redenomination slashes out several zeroes for example, instead of paying 100,000,000 for a house, with the new redenominated currency the payment is reduced to only 1,000,000. It also facilitates business transactions because smaller amounts of money are transacted. (GNA 2006) For example lesser zeroes are dealt with by bookkeepers and bankers hence the drudgery of the many zeroes are removed (GNA, 2006), the accounting process is simplified, the volume of transactions reduced, and efficiency of payments enhanced (Ghanacedi, nd).  Portability is one advantage of the redenomination project. Carrying large bags and suitcases in the case of the old currency runs the risk of attracting robbers (GNA, 2007; Mansah, 2007). The redenomination will also re-introduce to the public the use of coins in market transactions and helps the government introduce vending machines and car parking meters that require coins (Ghanacedi, nd).             Redenomination has a positive impact on the credibility of the currency (Agyepong et.al, 2010). One of the reasons why redenomination is undertaken in Ghana is to beat hyperinflation. In 2007, the old cedi suffered inflation at 111%. (Mansah, 2007). The new redenominated cedi will reduce inflation and the phenomenon of money illusion, which is the tendency for people to perceive that their currency has little or no value because of the many zeroes.  It also increases the confidence in the new currency because the zeroes are eliminated. This redenomination somehow signals the population that the government is serious by removing hyperinflation and that the economy is off to a better start. (GNA, 2006) The redenomination also protects the economy from currency substitution, which is the use of other currencies such as the dollar in market transactions, and reverses this behavior by the use of the new Ghana cedi. (Mansah, 2007) Finally the new cedi realigns the currency with the other West African countries that are members of the ECOWAS which uses the eco as the regional currency (Mansah, 2007). The same also happened in Europe with the introduction of the euro dollars by the European Union.             There are costs involved in redenomination especially during the interim period when speculation happens because of the uncertainty of the new situation, fraudulent scams, when the old cedi is exchanged for the new cedi, and disruption in the market resulting from price confusion which also has an inflationary effect. Not to mention the printing cost of the new notes, the cost of minting the new coins and the cost of disposing the old currency. (GNA, 2006)               Re-denomination does not have real economic effects because it does not increase a country’s GDP (Investors Iraq, 2011). GDP as we all know is the standard measure used to gauge the production of goods and services of a country. Redenomination does not affect the country’s productivity. There are three main factors that affect productivity; these are resources, technology and institutions (Investors Iraq, 2011). Note that institutional structures in Ghana is weak because of the rampant corruption that deter investors to bring investment into the country. Redenomination only creates an illusion that the prices of commodities are cheaper but it also brings the realization that wages are cheaper, thus redenomination does not increase the purchasing power of the new Ghanaian cedi. On exports and imports, the US will still pay the same for exports. The Ghanaian seemingly will look like they are paying lesser for the same product that they used to pay for more. Redenomination does not make a currency stronger because the strength and currency is determined by the demand and supply of the currency. Demand for the currency does not change because purchasing power does not change. Supply does not change because redenomination does not authorize monetary institutions to print more money. “Redenomination is just merely recalibration of the currency and does not mean that the currency has appreciated.” (Investors Iraq, 2011)             In the end we can conclude that redenomination works well with human psychology and with its positive effect on the psychological well-being of the people it may on some significant note affect how people behave positively towards the economy with the new redenominated currency.  Restoring credibility and confidence in an economy is a step towards bringing the economy to a really new start. REFERENCES Agyepong, EA., Tanka, LM., Oti-Boateng, B., Owusu-Ansah., E., 2010. The Effects of the Redenomination of the Ghanaian Currency (Cedi) on Local Trade. [online] Available at: <http://ghanagraduatesconference.com/ggc-2010/ggc-2009/conference-papers/124-the-effects-of-the-redenomination-of-the-ghanaian-currency-cedi-on-local-trade.html> [Accessed 5 May]. Ghanacedi, n.d. Benefits of the Redenomination. [online] Available at: < http://www.ghanacedi.gov.gh/Re-Denomination/benefits-of-the-redenomination.html> [Accessed 5 May 2011]. GNA, 2006. Redenomination will benefit economy. [online] Available at: < http://www.ghanaweb.com/GhanaHomePage/economy/artikel.php?ID=114997> [Accessed 5 May 2011]. Investors Iraq, 2011. Currency Redenomination (removing zero’s) Impact on economy . [online] Available at: < http://www.investorsiraq.com/showthread.php?81939-Currency-Redenomination-%28removing-zero-s%29-Impact-on-economy> [Accessed 5 May 2011]. Mansah, A., 2007. The Re-denomination of the the Cedi. [online] Available at: < http://www.ghanaweb.com/GhanaHomePage/features/artikel.php?ID=116579> [Accessed 5 May 2011].       Credit:ivythesis.typepad.com

THE EFFECTS OF THE REDENOMINATION OF THE GHANAIAN CEDI ON THE ECONOMY OF GHANA

THE EFFECTS OF THE REDENOMINATION OF THE GHANAIAN CEDI ON THE ECONOMY OF GHANA Redenomination has its advantages and disadv...

Issues of Budgetary Restraints on East African Community (EAC)

THE FUTURE OF THE EAST AFRICAN COMMUNITY             The East African Community (EAC) is a trading block in East Africa with five member countries: Republic of Kenya, Uganda, the United Republic of Tanzania, Republic of Rwanda and Republic of Burundi. It was established on November 30, 1999 with its headquarters in Arusha, Tanzania.  The EAC is established to deepen economic, political and social co-operation for the mutual benefit of all member states. In 2005, the EAC established the customs union, in 2010 a Common Market is established and by 2012 a Monetary Union will be created.             The five member states have a combined population of 125 million over a 1.82 million sq. kilometer and a GDP combined of US billion dollars (est. 2009) and 80 million people. The strategic relevance of the block is that member countries share a common history and speak the same language, the Kiswahili. All countries have a vast amount of natural resources, such as minerals, water, energy, forestry and life resources, agricultural, livestock and tourism. This brought the EAC as one large community with strategic and geopolitical importance. By pooling in their resources and by opening their economies for trade liberalization within the block the EAC is hoped to become a leading entity in East Africa. (Africa Business Pages,  n.d., CICC, n.d.)             While the EAC is promoted as geo-political and economic strategy by the government, we ask, “How do the ordinary citizen perceive the EAC?” For ordinary citizens, the EAC offers freedom of movement from one country to the other with fewer documents, ability to work and own lands on partner states, business opportunities, easier access of goods within the 5-member countries, better infrastructures such as the road systems, reduced tariffs and reduced taxation. These are the positive advantages of the new economic block as observed by those who frequently travel around the 5-countries. Members of the population in the informal-economy sector also observe an easier and less-restrictive business at the borders. A psychological benefit of the East African economic block is that it is perceived to improve a sense of belonging “being African” among the constituents of the 5 countries. But while the positive benefits are identified some of the members of the population in the EAC do not know the member countries. This is a gap that has to be addressed by the EAC by constant and continuous education and information communication.             One of the most talk-about issues regarding the establishment of the East Asian Community is the budgetary restraints. The five member countries are each saddled with their own economic woes unique to their country. This is addressed by budget transparency and accountability as a requirement for all member countries. Transparency and accountability can be learned through training staff and officials.  In Tanzania for instance, the issue on over-reliance on foreign loans, grants and aids to finance budget deficit cropped up. To improve transparency, it is suggested that donors have a role in providing transparency by harnessing the website technology where their budget books are posted for access to the public. (Daily News Tanzania, 2011) Each of the members of the East African Community are required a partnership contribution. Its proposed budget for the financial year 2011/2011 amounted to ,967,160 which is 24% higher than the approved budget of ,664,143 for the same financial year. This means that each partner country is required a 39% increase in contribution which is 29% higher than the council directive which allows for not more than 10% increase in their contribution. This has put more pressure on the budgetary constraints of the five countries that have already finished and completed their independent budget for the financial year 2011/2012. (Muwanga, 2011)             Recently talks on a single currency and an establishment of a single central bank resumes.  The East African Monetary Union (EAMU) requires the states to transfer their monetary sovereignty to the EAC which also necessitates the council to establish a permanent framework for a centralized decision-making of all EAMU matters and the single currency. (Talemwa, 2011)             The dream of a complete political federation by 2015, will make the 5 states a single political unit, with a single currency and a single head of state. This integration may still be a far-fetched reality in 2015 as some member countries are receiving the idea coldly. The other problem of the integration is that some countries have a relatively lower level of employment skills. In Rwanda for instance, much of their labor is unskilled. With integration, it is likely that Rwandan people are marginalized as some of the member-countries require highly skilled and specialized professions. (Ashmwe, 2009)             The complete political federation of the EAC will be the first of its kind in the world if it pushes. There are however a significant number of obstacles such as the reconciliation and integration of their budgets, a solution on their skilled and unskilled labor discrepancy as well as the integration of their independent laws and regulations into one. I think, EAC has a longer road to take to realize a complete political federation.   REFERENCES Ashmwe, A., 2009. East Africa: Hurdles Ahead for EAC Political Federation. Available at:< http://allafrica.com/stories/200907310052.html> [Accessed 29 May 2011]. Coalition for the International Criminal Court. The East African Community. [online] Available at:<http://www.iccnow.org/?mod=eac> [Accessed 28 May 2011]. Daily News Tanzania, 2011. Budget to be Read on June 8. [online] Available at:< http://www.africanfinancialmarkets.com/front-news-detail.php?NewsID=134823> [Accessed 28 May 2011]. East African Community. [online] Available at:<http://www.eac.int/about-eac.html> [Accessed 28 May 2011]. Mwatha Karega, RG., 2009. Benefits Experienced by Ordinary Citizens from East African Community (EAC) Regional Integration. Pdf. [online] Available at:<htt[:// news.eac.int/index.php?option=com_docman&task=doc...gid... > [Accessed 28 May 2011]. Muwanga, D., 2011. States Financial Constraints Hurt EAC Budget. [online] Available at:< http://www.busiweek.com/11/eac-issues/95-eac-news/947-states-financial-constraints-hurt-eac-budget> [Accessed 29 May 2011]. Shikwati, J., 2006. The Benefits of the East Africa Federation to the Youth. Speech. [online] Available at:<http://www.africanexecutive.com/modules/magazine/articles.php?article=751> [Accessed 28 May 2011]. Talemwa, M., 2011. East Africa Single Currency Talks Resume. [online] Available at:< http://www.observer.ug/index.php?option=com_content&task=view&id=11808&Itemid=68> [Accessed 28 May 2011]. The African Business Pages, n.d. The East African Community. [online] Available at:<http://www.africa-business.com/features/eac.html> [Accessed 28 May 2011].   Credit:ivythesis.typepad.com

Issues of Budgetary Restraints on East African Community (EAC)

THE FUTURE OF THE EAST AFRICAN COMMUNITY The East African Community (EAC) is a trading block in East Africa with five membe...