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The Euro

Some of the currencies mentioned in this chapter, such as the French franc, the German mark, and the Italian lira, are in the process of disappearing. Many European nations have decided to give up their national currencies and start using a new common currency called the euro. A newly formed European Central Bank, with representatives from all of the participating countries, issues the euro and controls the quantity in circulation, much as the Federal Reserve controls the quantity of dollars in the U.S. economy.

Why are these countries adopting a common currency? One benefit of a common currency is that it makes trade easier. Imagine that each of the 50 U.S. states had a different currency. Every time you crossed a state border you would need to change your money and perform the kind of exchange-rate calculations discussed in the text. This would be inconvenient, and it might deter you from buying goods and services outside your own state. The countries of

Europe decided that as their economies became more integrated, it would be better to avoid this inconvenience.

There are, however, costs of choosing a common currency. If the nations of Europe have only one money, they can have only one monetary policy. If they disagree about what monetary policy is best, they will have to reach some kind of agreement, rather than each going its own way. Because adopting a single money has both benefits and costs, there is debate among economists about whether Europe's recent adoption of the euro was a good decision. Only time will tell what effect the decision will have.

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