Advantages and Disadvantages of joining a Currency Union

Currency Union → Euro Zone of which there are 20

Same currency, European central bank controls monetary policy. 20 Nations

Don’t really need to fully discuss free market, globalisation etc etc

Croatia:

-tourism has been strongest pillar og Croatia’s GDP, nearly 20% of its GDP

  • population 4.1 million → may fall to 3.6 by 2040

  • GDP per capita is $12986

  • Government debt to GDP ratio (2022): 78%

  • UE rate in 2021: 8.2% of labour force

  • Inequality in Croatia: in 2021, the richest 20% held 36% of the income, while the lowest 20%

Benefits:

Lower costs → import raw materials, less transportation costs, Within EU lower tariffs, less admin costs, SRAS right. Depends on proportion of raw materials imported from Eurozone members

More FDI

Lower interest rates. Government debt lower, lower bond yield, lower variable mortgages, AD UP

More X services (tourism)

CAD down

Exchange volatility reduce

Downside:

No response to domestic shock

e.g. in a managed exchange rate, if currency depreciates , bank rate UP, buy domestic currency + self resolve. Reduces severity of depreciation.

Loss of monetary policy autonomy

e.g. if Croatia experiences recession ideally, would lower bank rate but with ECB (group that decides monetary policy for eurozone) may not be able to do this → convergence issue/synchronisation issue as in economic cycles are unlikely to align - one size policy does not fit all

TUTOR2U notes:

Drawbacks for a country joining the EuroZone

  1. Joining means that Croatia gives up the option of running an independent monetary policy - setting their own policy interest rates to meet MEOS

  2. Gives up the option of engineering a competitive depreciation of their currency

  3. Joining the Euro likely to lead to a one-time increase in consumer prices. Lower interest rates might also cause a boom in house prices/ rents which will damage affordability