International Finance Assignment Example | Topics and Well Written Essays - 2000 words

International Finance - Assignment Example in order for an economic union to be successful it is necessary to have following conditions among the member countries: 1. Labour mobility: Labour mobility is the free access to labour without any legal or cultural obstacle, and having similar wages and other employment conditions. 2. Capital mobility: It will allow the market forces to enhance the equal distribution of wealth and resources through supply and demand. 3. Similar Business Cycle: It will help the member countries in reducing inflation and increasing growth. 4. Automatic Fiscal Transfer Mechanism: It will help in redistribution of money towards less developed areas without federal interference. As of today, the European Union is comprised of 27 member countries having an aggregate population of around 500 million people. Making an economic union was a very bold and risky step for European countries. It involved not only the compromise on the individual monetary freedom of the member countries but also the integration of central banks. The basic purpose of this unification was to give economic support to member countries through the integration of economic and political policies. In order to enhance the importance of Europe in the monetary mechanism of the world, there was a need of unity among European countries. ... The European Union was officially created on 1st November, 1993 under the third Delors Commission. The Euro was introduced initially in a non-physical form like EFT or travelers cheques in January 1999 and captured the market completely in physical form on 1st January 2002. In contrast to the economist expectations, Euro survived a good length of time. It was the first experiment of its kind in the history. Many economists were skeptic about the future of Euro and its corresponding impact on European economic future. Several criticisms rose as to the applicability of the Optimum Currency Theory on European Union due to the lack of mobility of factors of production among member countries. US economists objected that European Union is not so integrated to issue single currency like the different states of US. However they overlook the fact that it took more than 150 years to United States to integrate the monetary system of all states by issuing Dollars for the entire nation. However t he theory of optimum currency area does not include political economy factors like the desire for European integration on political level, reducing the exchange rate risks and achieving stable price levels. US economists also believed that the entire European monetary integration was basically a political ploy and therefore lacking the necessary criteria of the optimum currency area. On the basis of the crisis of European Exchange rate system in early 90s, they begin to suspect the viability of this monetary union. From the very beginning of the European monetary integration process, this union is always question on the basis of the optimum currency area theory. The basis of all criticism was that the Europe was not at