A trading bloc is a group of countries which get together and decide to allow free trade between members of the trading bloc. The European Union is an example of a trading bloc and not every member of the EU ; such as the UK; has decided to take part in the Euro Zone (the single currency for European countries: the Euro).
A single currency would allow for trade creation amongst the countries with this currency. The single currency means that goods can be exchanged between countries in the trading bloc because there are no barriers such as exchange rate barriers. The single currency allows goods to be exchanged quickly because of the similar currency meaning that countries can just buy goods from other countries within the trading bloc without having to exchange the currency in order to purchase the goods. The effects of this leads to an increase in standards of living for the consumers within the trading bloc as they can get the goods easily and cheaply (no exchange rate difference) so they have a much higher choice of goods.
Another effect is the possibility of Foreign Direct Investment occurring. FDI is when a firm tries to invest abroad into a foreign market. The single currency could encourage FDI into the trading bloc – bringing with it an inflow of capital into the trading bloc. For example, Japanese car makers could set up in Germany to take advantage of the single currency and trading bloc i.e. sell cars to any country in the EU without protectionist barriers such as Tariffs and there are also no exchange rate barriers. No exchange rate barriers allow consumers from any country in the Euro zone to purchase the Japanese cars easily with the usage of the Euro. Therefore, it will again benefit consumers as they can purchase a range of goods with the Euro, it also benefits the economy as FDI will increase employment and will let the government gain revenue through corporation tax.
Consumers are the main stakeholders who will benefit from the single currency. As mentioned above, consumers can get goods easily within the trading bloc as the single currency allows goods to be exchanged without having to change from one currency to another. Also, producers can get raw materials from within the trading bloc for low prices because the similar currency leads to the raw materials being priced the same regardless of which country the producer is in (as long as it is in the trading bloc). Therefore the low costs of raw materials could have a knock on effect to consumers as they can get goods for a much lower price. Overall, the consumers will highly benefit from the single currency.
Eval. Monetary Policy is the usage of Interest Rates and control of the money supply to try to meet macro economic objectives, mainly to control inflation. The introduction of a single currency to a trading bloc means that Monetary Policy cannot be used to control the economy as interest rates for the single currency are controlled by one back such as the European Central Bank controlling a single interest rate for the Euro. Monetary Policy is vital to make sure an economy is growing and functioning correctly, without a Monetary Policy an economy can suffer drastically – such as Greece who are now in huge debt and face other issues such as high unemployment! Therefore, joining the single currency may not be as ideal as it seems because it gives the government less control and the ECB’s interest rate may not be at a rate for every single country so come countries will benefit while others will not.
Eval. The single currency will only work if all the economies are convergent. That means that they are similar and heading in a similar direction, factors include: inflation, GDP growth rate and unemployment…basically all the macroeconomic objectives. If some countries are not convergent and not following the same pattern as the rest of the countries then they will feel the disadvantages of the single currency in the long run. For example, if Germany is facing a decrease in GDP growth and the ECB decides to put long term high interest rates then the rest of the countries will face a decrease in economic growth which may be good for them if they want to avoid a boom but Germany will just keep having a decrease in Economic growth.
Eval. On the subject of similar interest rates. The countries within the trade bloc need to help each other succeed and they are all dependent on each other’s actions. So, like what is happening in the EU at the moment, if one of the countries has a massive budget deficit and face massive debt then the other countries in the EU need to make sure that they do everything in their power to help that country and make sure the strength of the single currency and trade bloc. Currently, Greece is facing massive debt and may default soon, so the other countries need to spend huge sums of money to keep Greece alive which is a pain for the countries who are bailing them out – such as Germany. In the long term, if one country faces debt then this could accumulate and may even lead to knock on effects where other countries within this single currency face the same problem, in the end all the countries will be affected.
Eval. The single currency will also affect countries outside of the trade bloc. If the single currency is strong then other countries outside the single currency may start to export their goods to the countries within the single currency because a strong currency leads to an increase in demand for imports. This could lead to the countries outside the currency benefiting from the high amount of exports they are exporting to the trade bloc that they could face high employment and increasing economic growth. Therefore, not only will countries within the trade bloc face the effects of a single currency, other countries will also be stakeholders and face the effects of a single currency.
