eurozone criteria

Question 1

criteria

Answer 1

Use the same interest rate, for example floats against the US dollar and the pound sterling
Required to control their government finances so budget deficits can’t exceed 3% of GDP
Gross national debt has to be below 6% of GDP
Inflation has to be below 1.5% of the three lowest inflation countries
The average given on yields has to be below 2% of the yield of the countries with the lowest interest rates. This insures there can be exchange rate stability

Question 2

advanatges

Answer 2

o stability of currency allowing for business planning
o trade creation due to reduced transaction costs
o possible benefits from increased specialisation and gains from comparative advantage o price transparency between fellow members
o possible reduced inflation due to reduced import costs
o attracting inward investment
o protection for smaller countries from financial crisis or speculation

Question 3

disadvantages

Answer 3

changeover costs or menu costs to firms
o the inability to have control over the instruments of monetary policy
o ‘one size fits all’ interest rates
o possibly not an optimal currency area due to cultural/language barriers o possibly limits to fiscal policy such as the EU growth and stability pact o no scope for a competitive devaluation