The latest phase of globalization has weakened a Europe that remains structurally unable to keep up with the moving target of competitive challenges from outside the continent. EMU is touted as Europe's answer to all of these problems. No one nation in the EU is large enough to produce larger companies. The single currency, therefore, will allow Europe to achieve the right scale of production by lowering transaction costs now associated with currency conversions. Lower transaction costs will stimulate more cross-border mergers and acquisitions, create a larger internal market, and allow European companies to become more price competitive.
Every argument turns on transaction costs and currency conversion.
If transaction costs are the impediment, however, a single currency is a very costly and ineffective policy answer. They can be lowered directly by a more efficient clearing mechanism among banks at lower cost than by monetary union. Modern marvels of information processing, computer power, and telecommunication wizardry are ideally designed to tackle this problem. In these areas Europe is woefully behind best practice financial institutions and will have to make the investment and internal changes in banking practices even if there is a single currency. Nothing will magically transform old practices and obsolete technology.