In addition to cutting costs and risk, the European Union’s single currency benefits business by encouraging investments and bringing more certainty to business planning thus allowing businesses to be more effective overall.
Advertisement
More cross-border trade
A direct benefit of the euro is that, within the euro area, there is no need for businesses to work in different currencies. A company can buy and sell throughout this area, paying and being paid in euro.
Previously, when doing business in another EU Member State, a company would need to take account of the risk of fluctuating exchange rates i.e. the stated foreign currency amount on the invoice might change in value before being paid. This meant either export prices were higher, or companies were discouraged from exporting within the single market. This risk has now gone, as have the costs associated with exchanging different currencies. Before the euro, these exchange costs were estimated at 20 to 25 billion per year in the EU (as much as 0.3% to 0.4% of GDP) much of it incurred as companies transferred goods, people and capital around Europe. With the euro, these costs have disappeared in the euro area, and this money is now available for more productive investment.
With no exchange risks and costs, cross-border trade within the euro area is encouraged. Not only can companies sell into a much larger home market, but they can also find new suppliers offering better services or lower costs a development that is helped by the growth of e-commerce over the internet. Trade within the euro area is estimated to have increased between 4% and 10% since the introduction of the single currency.
Better borrowing, better planning, more investment
Before the euro, volatile interest rates meant unpredictable costs. With the euro, inflation has come down to a low and stable level, which also means low and stable interest rates. Firms can borrow more and more cheaply and can invest more confidently in the long term.
Long-term investment is further encouraged by the sound and prudent management of Economic and Monetary Union, which builds trust in the economy of the euro area and reduces uncertainty about the future. Companies can invest more in growth and new technologies rather than saving money in reserve in case of an economic downturn.
Better access to capital
The euro gives a large boost to the integration of financial markets across the euro area. Investors, such as banks, are no longer limited to local markets. Capital can flow more easily because exchange rate risks have disappeared and because financial market rules are being progressively harmonised allowing investors to move capital to those parts of the euro area where it can be used most effectively.
More international trade
The euro is a strong international currency backed by the commitment of the euro-area Member States and the firm and visible management of monetary policy by the European Central Bank. The euro area is also a large and open trading bloc. This makes doing business in euro an attractive proposition for other trading nations, which can access a large market using one currency. Euro-area companies also benefit because they can export and import in the global economy while paying, and being paid, in euro reducing the risk of losses caused by global currency fluctuations.
Source: European Commission
