MERCOSUR can learn great lessons from the implications of using the Euro by the European Union. According to Destais et al. (2019), the Euro’s use has come with its benefits and disadvantages. The pros and cons of using the Euro provide a comprehensive framework that highlights issues that MERCUSOR can consider while deciding whether or not to develop a common currency. The use of the Euro has enhanced economic integration in the European Union in several ways.
Read also The U.S. Dollar Premier Currency
Firstly, there has been an upsurge in foreign investment due to reduced foreign exchange risks. In a scenario where countries use different currencies, there are higher investment risks due to the foreign exchange market’s volatility and high-interest rates. The use of common currency eliminates the risks affiliated with the help of different currencies. Consequently, private investors in countries with relatively weaker currencies can make investments with countries with stronger currencies without the risk of paying high-interest rates. Besides, investment is encouraged through increased lending as countries with stronger currencies can lend to countries with previously weaker currencies with minimal currency risks.
Secondly, lowered transaction costs due to the elimination of foreign exchange also promote trading activities within the member countries region. Trading involves traveling, which is often discouraged by the expenses related to exchanging money from one currency to another. Since the Euro’s establishment, traders can travel within the European Union member countries at a relatively lower cost. Also, the use of common currency significantly promotes foreign trade as suppliers from various countries within the Trade Union can supply to each other without foreign exchange costs. Consequently, the Trade Union member countries gain a competitive advantage against non-member countries.
Thirdly, a common currency fosters mutual support among member countries to a regional trade union. For instance, during the current coronavirus pandemic, the European Central Bank has successfully used monetary policies in profoundly affected countries such as Italy to stabilize its economy. Besides, France and Germany initiated a recovery fund for European Union member countries worth 500 billion euros. The initiation of such a supportive mechanism would be difficult, if not impossible, for countries using different currencies (Heinemann, 2020).
Albeit there are benefits of using a common currency, the use of common currency comes with shortcomings like in the Euro’s case. The EU established a rigid monetary policy that somehow fails to align with the economic conditions of each member state (Höpner & Spielau, 2018). For instance, the monetary policy in high growth countries like Germany may not be applicable in countries like Greece. For example, when Germany needs to increase its interest rates to conquer inflation, Greece should be lowering the interest rates to encourage borrowing and vice versa.
Furthermore, the use of a common currency may favor some individual member countries. For example, in developing the Euro exchange rate mechanism, the exchange rate was fixed in Germany. Germany’s economic capability is way much more robust compared to other countries like Portugal and Greece—setting Germany as the standard has caused adverse economic effects such as increased debts and high unemployment rates in other countries.
Should Associate Countries be Included in Development of MERCOSUR Common Currency?
The associate member countries should not be included in the development of a common currency. Associate MERCOSUR members enjoy the benefits of free agreements such as the current member countries, but they do not have voting rights (De Almeida, 2018). Also, involving the associate members would increase the number of countries and present problems in the development of the exchange rate mechanism. It is much easier to develop an exchange rate mechanism for four countries than for eleven countries.