4 ms·

Before adopting the Euro, countries spend some amount of time in the ERM (Exchange Rate Mechanisms) where the currency is pegged to the Euro. Thus, the actual s

Before adopting the Euro, countries spend some amount of time in the ERM (Exchange Rate Mechanisms) where the currency is pegged to the Euro. Thus, the actual switch is just a note swap, the actual advantages and disadvantages are already there. The real issue is they lose the ability to issue debts in their own currency and whether that's good or bad depends hugely on individual counties. It has worked well for some, not for others.

buzzdenver 4y ago
> The real issue is they lose the ability to issue debts in their own currency and whether that's good or bad depends hugely on individual counties. Having your own currency also allows you to set monetary policy and not just follow the European Central Bank. So in time of financial crisis you can print as much money as you want and fiddle with exchange rates to make your country more competitive.
Someone 4y ago
> Thus, the actual switch is just a note swap, the actual advantages and disadvantages are already there. Not quite. When your currency is pegged to the euro, the exchange rate isn’t fixed; you only promise to try and keep it fixed. If that turns out to be impossible (or you don’t want to do it anymore), you can change the exchange rate or decide to stop that pegging. Of course, that you could do that has a price: people will weigh the risk of something like that happening when they invest in your currency. If you join the euro, the exchange rate becomes 100% fixed. Giving up that flexibility removes some uncertainty for investors, and that may be beneficial to you (technically, you could still exit the euro system and reintroduce a national currency, but your national debt and interest payments would still be valued in euros, diminishing the effect you get from getting back your own currency. It also is deeply uncharted territory; I’m not even sure rules for doing it have been made. Markets may judge a move like that similar to how they would judge defaulting on your loans) In some sense, pegging to the euro is the try-out of “what would happen if we joined the euro?”

buzzdenver 4y ago

> The real issue is they lose the ability to issue debts in their own currency and whether that's good or bad depends hugely on individual counties. Having your own currency also allows you to set monetary policy and not just follow the European Central Bank. So in time of financial crisis you can print as much money as you want and fiddle with exchange rates to make your country more competitive.

Someone 4y ago

> Thus, the actual switch is just a note swap, the actual advantages and disadvantages are already there. Not quite. When your currency is pegged to the euro, the exchange rate isn’t fixed; you only promise to try and keep it fixed. If that turns out to be impossible (or you don’t want to do it anymore), you can change the exchange rate or decide to stop that pegging. Of course, that you could do that has a price: people will weigh the risk of something like that happening when they invest in your currency. If you join the euro, the exchange rate becomes 100% fixed. Giving up that flexibility removes some uncertainty for investors, and that may be beneficial to you (technically, you could still exit the euro system and reintroduce a national currency, but your national debt and interest payments would still be valued in euros, diminishing the effect you get from getting back your own currency. It also is deeply uncharted territory; I’m not even sure rules for doing it have been made. Markets may judge a move like that similar to how they would judge defaulting on your loans) In some sense, pegging to the euro is the try-out of “what would happen if we joined the euro?”