This article discusses the disadvantages for all EU countries entering the customs and monetary union, particularly the problems that occur due to its falling exchange rate against the dollar. It mainly focuses on problems concerning imports from the US which may result, to imported inflation . A country is prone to imported inflation when its economy is reliant on imports because the low exchange rate means the price of the imported goods will be higher than it would be had the exchange rate been higher. Contrastingly to the article though, I am going to discuss but the benefits it will bring to EU countries.
In the EU we have a variation of protectionist schemes that are being carried out at the moment the biggest of which is the CAP . What these schemes aim at is to increase European exports without however, compromising good quality imports. This happens because despite the fact that an economy can’t achieve a state of self- sufficiency all the countries within the EU together can do so, even if the economies within it don’t operate under the above protectionist schemes.
So I shall prove to you that economists worries on imported inflation as a result of a low exchange rate has no basis for two reasons.
The first reason is because the only currency that in 2000 posed a significant threat to the Euro was the dollar and nowadays the majority of exports come from China and Japan against which the Euro stood strong as a currency. In other words the Euro won’t have to rely on imports from countries against whose currency the Euro was weak.
The second reason is that even if the Euro was the weakest currency in the world the EU would still have nothing to worry about. This would be so because due to its low exchange rate it could sell more exports since they would be cheaper compared to all other products. On the other hand even if the EU depended on US imports the cheap EU goods would create competition with goods from the US thus forcing US producers to reduce their price as seen in figure 1 thus creating excess supply.
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Despite the above, some worries are valid because foreign economies could still impose protectionist schemes against EU products. This is mainly because as stated in the article the Maastricht Treaty prevents the ECB from involvement with the currency and its exchange rate unless it’s to ensure price stability. However the harm the low exchange rate might cause will be eliminated at least partially because they might be able to flood the global economy with cheap EU products thus creating a balance of payments surplus which will enable them to afford imports. Moreover the fact that so many developed countries will be using the Euro will increase its demand which may lead to a rise in the exchange rate for population reasons as seen in figure 2.
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