Advantages of a Monetary Union

• A single currency eliminates exchange rate risk and uncertainty - As countries within the Monetary Union all use the same currency, there is no risks from sudden changes in exchange rates increasing costs or reducing profits, therefore creating a more certain business environment. 

• A single currency eliminates transaction costs - As the countries use the same currency, the costs of processing and exchanging one currency for another is not required. Therefore, this can lower costs for firms operating between the two countries now using the same currency. 

• A Single Currency Encourages Price transparency  - As the prices of goods will now be priced in the same currency, consumers in all countries can now see the cheapest producer across the two countries. With individual currencies, goods may be cheaper or more expensive due to fluctuations in exchange rates and the prices may not have reflected the actual cost of production. 

• A single currency promotes a higher level of inward investment. - as firms across countries use the same currency, it is easier for firms from each country to invest into the other. This can therefore encourage higher levels of inward investment by firms into the two countries and therefore, this can promote long term economic growth in both countries. 

• Low Rates Of Inflation Give Rise To Low interest rates, more investment and increased output - As a result of using a single currency, countries may experience lower levels of inflation and price stability. As a result, this may lead to lower interest rates and therefore promote higher levels of investment and therefore economic growth. This was the case for countries like Greece and Spain when adopting the euro. The Euro brought more price stability and lower levels of inflation, compared to their own currencies, and therefore more stable economic environments, promoting investment and growth. 

Disadvantages of a Monetary Union

• A single currency involves loss of exchange rates as a mechanism for adjustment - As prices are now reflected in one currency, price competition will cause those more efficient firms to be able to sell more and those less efficient firms to sell less. As a result, a country could no longer devalue its own currency in order to boost its exports and therefore achieve economic growth. 

• A single currency involves loss of monetary policy as an instrument of economic policy. -  As monetary policy is now controlled by a central bank for all members of the monetary union, individual countries will lose the ability to use monetary policy and the control of their own money supply in order to promote economic activity or slow an overheating economy. 

• Fiscal policy is constrained by the convergence requirements - When joining a monetary union, countries must usually meet a set of requirements in order to join the monetary union and must adhere to once a member. This is to ensure stability in the new monetary union.  This can limit a government's ability to use fiscal policy, in order to meet the requirements. For example, to join the euro, member states must have:

an annual government deficit that must not exceed 3% of GDP and Government debt must not exceed 60% of GDP

• Monetary policy pursued by the single central bank impacts differently on each member - each member of the monetary union may be experiencing a different economic environment. Therefore it may be difficult for the new central bank to balance monetary policy to achieve the macroeconomic objectives in both countries. For example, at the end of 2021, unemployment stood at the following for these 4 members of the eurozone: 

Italy 9.9%, Germany 5.7% Greece 12.9%. 

Therefore, the policies used by the ECB must support economies with very different levels of economic activity and objectives.