Relationship Between Foreign Countries Through Monetary Integration

Question: Discuss about the Analyze A Relationship Between Foreign Countries Through Monetary Integration. Answer: Introduction: At present, economic integration is a common term, which represents an arrangement between various countries to reduce the trade barriers within them and to coordinate fiscal and monetary policies. The chief goal of this integration is to reduce costs associated with consumers and producers by increasing international trade within those countries, who have involved them within this economical agreement (Martin Ross, 2004). Economic integration, by providing less trade barriers, has helped its member countries to enhance relationship, economically and politically. This report intends to analyze a relationship between foreign countries through monetary integration. In this context, the report is going to describe the European monetary integration through the Maastricht Treaty and some others related to the same context. Advantage and disadvantage: Monetary integration has some economical advantages and disadvantages corresponding to its international activities, for instance, trade benefits and cooperation between employment and political activities. Through this process, countries get opportunities to trade with each other with lower a cost, which in turn has helped those countries to enjoy comparative advantage and to enhance purchasing power (Antrs Costinot, 2010). Trade liberalization has further helped countries to enhance employment opportunities through market expansion, foreign investment and other technological improvements. As a consequent, the political relation between those countries have also increased due to this positive implications of integration on all countrys economy. Instead of those advantages, this economic integration has also some negative impacts on as well. Those implications can be come in the form of trade deviation and reduction of sovereignty among countries as this integration is needs to follow some policies and trade rules at international level, which is implemented by an external policy implementing body. Measurement of integration: As economic integration has some positive implications on a country, it is essential to measure the degree of this integration across regions or countries, which have operated under these circumstances. Hence, to measure this integration, some methodologies can be adopted, based on various economical indicators that incorporate trade of products and services, migration of workers and international cash flows and so on. According to this assessment, the European Union (EU) and the United States (U.S) have possessed the worlds largest investment and bilateral trade relationship through economic integration. European Monetary System (EMS): The European Monetary System (EMS) was constructed in 1979 to stabilize inflation and to control exchange rate fluctuations among European countries after collapsing of the Bretton Woods Agreements in 1972 (Bayoumi Eichegreen, 1993). Hence, the European Central Bank (ECB) was formed in 1998 and consequently the euro was generated as a unified currency, which most of the EU countries had started to use. To link currencies among all countries under the European Economic Community (EEC) by a single one, the EMS had implemented a new policy to formulate the European Currency Unit (ECU) along with stabilization foreign exchange rate. Due to different political and economical conditions of the member countries of the EMS, for instance, Germanys reunification, it had faced crisis in the initial phase of 90s, which in turn influenced Britain to withdraw its membership from the EMS (Bhagwati, 2004). However, the mechanism to form a common currency by creating large economic alliances had continued, which in turn had helped most of the countries of EEC to sign in the Maastricht Treaty for establishing the European Union (EU). The Maastricht Treaty: The member countries of the EU had undertaken that treaty in 1992 for integrating Europe, in Maastricht of Netherlands. The treaty had come into action in 1993 at the Delors Commission, where it had made the structure of the EU through three pillars for making the Euro as the single European currency. The first pillar was based on community integration method, the second one stated about the intergovernmental cooperation method and the last one was based on intergovernmental cooperation method (Torres Giavazzi, 1993). However, those pillars were abolished in 2009 when the Treaty of Lisbon was formed. This treaty had played a significant role for creating the euro and at the same time, it had imposed some obligations to its member countries to follow, for instance, the member countries required to maintain a good fiscal policy by maintaining debt within 60% of GDP and also to maintain annual deficit below 35 of GDP (Weber, 1995). This treaty has set some criteria for its EU members to enter into the third stage of the European EMU by adopting the Euro as the common currency (Johnston Regan, 2016). Through four criteria, the Maastricht Treaty has tried to control excessive inflation, public deficit and public debt along with stability in exchange rate and the interest rates convergence. It can be seen from the above figure that the GDP of all member countries of the EU has experienced an increasing trend of gross domestic product (GDP), which in turn has implied that the monetary integration has affected those countries positively by increasing trade facilities. It can also be seen that the EU has experienced trend of import of goods and services after this integration as it has reduced the cost of international trade through reducing tariff of the international trade. Treaty of Lisbon: This international treaty has compensated two treaties, which have formed the constitutional base of the EU. This treaty was signed in 2007 while it had taken action in 2009. The two treaties, which were amended by this treaty of Lisbon, are the Maastricht Treaty and the Treaty of the European Union (Cooper, 2012). However, this treaty has opened up many questions related to the functions of the EU and this further has opened up a new way for creating another treaty. Conclusion: It essential to understand the role of economic integration or in other words, the impact of monetary integration, as it can help countries to enhance its economic activities through international trade and co-operation with each other for maintain a good relation related to economic and political situations. Trough introducing the unique currency, the euro, it has become useful for the member countries to operate with each other uninterruptedly through stabilizing exchange rate and controlling inflation. References: Antrs, P., Costinot, A. (2010). Intermediation and economic integration.American Economic Review,100(2), 424-28. Bayoumi, T., Eichegreen, B. (1993). Shocking Aspects of European Monetary Unification. Cambridge: Cambridge University press Bhagwati, J. (2004).In defense of globalization: With a new afterword. Oxford University Press. Cooper, I. (2012). A virtual third chamberfor the European Union? 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