ction costs involved in switching between currencies. The price of the good will be set in euros in all of the countries in the euro area. “This transparency will be coupled with the greater freedom of movement of goods and services within the single market an the overall effect should be to encourage competition and drive prices lower.” This will be a disadvantage to retailers who will find it increasingly difficult to differentiate prices between markets. Due to the absence of exchange rate risks, entrepreneurs feel more comfortable establishing businesses that take advantage of small differences in cross-border prices. Also, some claim that these price transparencies created by the euro will eliminate continental price differences for identical goods and services. However this is incorrect since prices are determined by the interaction of supply, demand, and regulation in a wide variety of competitive environments. Therefore, the introduction of a common currency in Euroland does not eliminate price differences. Finally, the creation of deep financial markets is the fourth and last direct benefit of the introduction of the euro. “Before the euro, efforts to match the immediate financial needs of consumers with the investment requirements of savers were plagued by the psychological and economic costs of 11 national currencies.” Every type of financial device such as government bonds, commercial bank loans, and stock was listed in a national denomination. This fractured financial markets and discouraged foreign investment and would have done so even without transaction costs and exchange rate risks. The euro revolutionizes this situation. Since January 1, 1999, Euroland’s major exchanges have listed their financial instruments in euros. To investors and borrowers, such developments have made the European financial markets broader, more accessible, and more liquid. Because this promotes...
