Economics, 3rd Edition

THE BENEFITS AND COSTS OF A COMMON CURRENCY

Benefits of a Single Currency

Elimination of Transaction Costs 

One obvious and direct benefit of a common currency is that it 

makes trade easier between members and, in particular, there is a reduction in the transaction costs 

involved in trade between members of the common currency area. When a German company imports 

French wine, it no longer has to pay a charge to a bank for converting German marks into French francs 

with which to pay the wine producer, it can just pay in euros. Of course, the banking sector loses out 

on the commission it used to charge for converting currencies, but this does not affect the fact that the 

reduction in transaction costs is a net gain. This is because paying a cost to convert currencies is in fact a 

deadweight loss in the sense that companies pay the transaction cost but get nothing tangible in return. 

OK, so the banks were getting commission before and this was used to employ people who worked on 

currency transactions, but these people can now be used more productively in the economy, making 

everyone better off.