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When the single currency was planned, there was no internet and there all currency exchange was manual.

Today the web can automatically convert prices using multiplication of the numbers in the price field, and robotic cash exchange can count and exchange currencies better and cheaper than a human exchange.

Does the UK suffer an considerable economic handicap from having not adopted the Euro? Is the single currency concept nearly obsolete?

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  • $\begingroup$ To global currency speculator , Euro is a lousy currency. It is difficult to short selling Euro. $\endgroup$ – mootmoot Mar 5 at 9:35
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Very good points about the role of modern tools (the web, robotic cash exchange, etc.) are raised. The classic argument is that trade should expand within the eurozone following (1) increase in price transparency, (2) elimination of currency conversion costs, and (3) elimination of exchange rate fluctuations.

Are the classical arguments challenged by modern tools?

  1. Price comparison across border is surely much easier today with the web than it was in the nineties.
  2. In its report One Market One Money, the European Commission (1990) calculates that eliminating costs of conversion of currencies and costs of cover for exchange risk will reduce costs by .25 to .5 of 1 percent of total output in the EU. The report also stresses additional gains that would come from the elimination of “in-house costs” associated with multiple units of account. These are reductions in costs connected with record keeping, accounting and decision-making. The question: How much lower are the conversion costs thanks to modern tools? Even if they are now lower, they are still positive.
  3. Despite modern tools, exchange rates still fluctuate.

So, the adoption of the single currency may still boost trade.

The role of modern arguments

To these classical arguments, we can add more subtle ones. For instance, in some industries, components cross borders many times before being assembled and sold as a final good, even a small reduction in transaction costs can increase trade flows non-linearly (Flam and Nordstrom, 2006).

In a series of papers, Richard Baldwin adds that adopting a single currency may (1) reduce collusion among competitors and eliminate pricing mark-ups and enhance trade (p. 63-64); (2) increase the entry of small firms by reducing the fixed cost of trade.

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  • $\begingroup$ Could you please link to the paper where he argues that the unified currency reduces collusion? $\endgroup$ – Giskard Mar 4 at 22:44
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    $\begingroup$ Done, with pages. I also added a reference for "even small trade cost reductions could have large effects". $\endgroup$ – emeryville Mar 5 at 6:37

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