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    The perils of convergence

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    (i) The above article says, "Many are eager to join, so as to reap the benefits of eliminating currency risk, lower interest rates than they now enjoy and (they fondly hope) faster economic growth." Why will joining the Euro achieve this for ex-communist countries such as Poland and Hungary?
    (ii) The article further says, "They are supposed to meet the same entry conditions as those set for the 12 current members of the euro area. As well as low inflation and long-term interest rates, budget deficits below 3% of GDP and government debt below 60% of GDP." What is the economic rationale for imposing the stringent requirements of budget deficits below 3% of GDP and Government debt below 60% of GDP as entry conditions for joining the Euro?

    © BrainMass Inc. brainmass.com December 24, 2021, 4:44 pm ad1c9bdddf
    https://brainmass.com/economics/economic-growth/perils-convergence-4522

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    Hi There,

    Here are my thoughts regarding your queries:

    The adoption of the euro will have beneficial results for the economies of all Member States, bringing in particular, stability, low interest rates and a zero exchange risk. For business, the euro will cut the cost of doing business and simplify cross-border trade. For the consumer the euro will promote greater competition and a wider choice of goods and services, stable prices and lower interest rates. For the traveller, the euro will make travelling cheaper and easier by eliminating currency exchange charges.

    The adoption of the euro will have beneficial results for the economies of all Member States, bringing in particular:

    stability - a situation of monetary crisis, like the one Europe experienced in early 1990 and led to the realignment of parities of certain currencies within the European Monetary System and the withdrawal of others from the system, could not happen again. Because of its size, the European Central Bank can more easily absorb the shocks of any future disruptions.

    low interest rates - thanks to market confidence fostered by a strong and independent European Central Bank. Low rates, particularly low long-term rates, will promote investment, encourage economic growth and stimulate job creation.

    a zero exchange risk - fixed parity will mean greater transparency of prices for goods and services leading to stronger competition, lower consumer prices and new business and co-operation opportunities for European firms.

    a) Why will joining the EU eliminate currency risk for Hungary & Poland? Because they will no longer have their own currency. As a result of having a shared currency with the rest of Europe, they will not have to deal with sudden shifts in the valuation of their currency. To illustrate, a few days ago in Paris, there was a huge strike by hundreds of thousands of public service workers. They were striking because of an issue with the gov't over their pensions. If there were to be such a strike in Hungary, the rest of the world could panic and pull their investments out of Hungary. The investors might get worried that the general strike could hurt the overall productivity of the country and choose to invest their money elsewhere. When Hungary joins the EU, events like a strike or a devastating flood will not have an impact on the currency of the EU.

    b) What is the economic rationale for imposing the stringent requirements? The rest of the EU wants to ensure that the incoming nation is able to stand on its own and be a positive impact on the rest of the union. They do not want to be negatively impacted by a country who does not have their financial house in order.

    I hope this helps. Please leave me a rating and or comments to let me know if I was able to assist you. Thanks.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 4:44 pm ad1c9bdddf>
    https://brainmass.com/economics/economic-growth/perils-convergence-4522

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