Monetary unions tend to bring countries together, help them reduce exchange rates, reduce volumes of foreign market reserves as well as achieve greater money stability. However, monetary unions could also negatively affect some countries that join them. Countries that enter into a monetary union face challenges such as a high initial cost of infrastructure, loss of independence of their national currency, impact of a monetary union on the monetary policies of the country, and loss of control of shock, which can lead to inflation, hence making it very hard to run economies with a large budget deficit especially if you need to buy essays database concerning this topic.

The first difficulty is that entrance into a monetary union requires the member states to invest heavily. Heavy investment is needed to obtain the relevant technology to be used by the member states. Additionally, member countries have to print the currency that is used in a monetary union, which can be very costly. Some countries may not be willing to invest in the new currency, as managing a local one is less expensive than having to print the currency used in the monetary union. For instance, in South Africa, such countries as Botswana and Zimbabwe have not been able to join the African Monetary Union because their governments find it expensive to shift to the new monetary policy. In addition, monetary unions will be disadvantageous to those countries whose economies are stronger compared to their counterparts. This challenge will occur because there will be a standard value for the currency that they will be used by the member states. For instance, South Africa will be at a greater disadvantage if its neighboring countries such as Botswana and Zimbabwe enter into the monetary union, as it has a strong economy in the region.

Countries that have open economies can benefit more from joining a monetary union. Countries tend to have different policies on businesses. There are countries whose regulations of the shift from one business to another are not stringent, which enables their citizens to conduct business both in their native countries and abroad. By contrast, countries whose economies are closed will be at a disadvantage, as in such countries, business ventures could be very restricted by law. Thus, in 2010 - 2012, the countries of Europe were reluctant to accept the United Kingdom into the European Monetary Union because the state has policies that allow doing business without severe restrictions. Other European countries feared that their benefit might not outweigh profits that the United Kingdom would gain from the union.

There are times when the constituting states want to leave a monetary. Thus, they might feel that their economies have grown considerably and therefore wish to have their exchange rates reviewed. For instance, in the 1990s, the German economists drew a conclusion that their economy had expanded and insisted on reviewing the exchange rates of the country. Reviewing of the currency on a country tends to ignite supremacy battles, which could negatively affect the whole union. Other countries might feel that their interests are neglected in the review and hence would leave the union.

Additionally, monetary unions will suffer if member countries have volatile economies. The changes in a country’s economy influence other uncontrolled factors, such as inflation. Such uncertainties in a country will be a setback in trying to establish a stable economy, which is the main reason why monetary unions are formed. Unstable economy will be a disadvantage to the countries that will enter into a monetary union, as they will have to cope with uncertainties that result from unstable economies of the partner countries. For instance, the South African rand, which is the currency of South Africa, wanted to expand its use to other African countries. The member countries of the African Monetary Area were reluctant to accept such changes in their economies. Thus, countries with unstable economies realize that they will not benefit from joining a monetary union as it will render their rates of exchange lower.

The rate of economic growth of member states will also have an impact on the monetary union. Countries have different growth rates, which are reflected in their Gross Domestic Product. The increase in economic development is different in each country because of the various levels of production. If a country’s Gross Domestic Product is low and the country needs to borrow from other nations to cover its expenditures, its entry will negatively affect the monetary union. Other countries, whose Gross Domestic Product is higher, will feel the adverse impact of the entrance of the nation with a low GPD into the monetary union.

Another disadvantage of being a member of a monetary union is the lack of currency independence. Cohen argues that when a country is a member of a monetary union, it loses the sovereignty of its currency. Every country that joins a monetary union has to lose the freedom of its currency by adopting a common currency that is used by the partner countries in the union. The transfer of the fiscal competencies and money to a communal level will mean that countries with strong and stable economies will deeply influence economic policies of those countries with weak and unstable economies. For instance, although the euro is the official currency in the European Union, the US dollar is a commonly accepted currency. The widespread use of the dollar shows that the United States largely influences economic policies of the European Monetary Union. Moreover, this currency is used not only in Europe but also in many other countries of the world, thus affecting their economies.

Apart from the lack of sovereignty of the currency, a nation that joins a monetary union will lose independence of its monetary policy. Each country is affected differently by demand shocks and therefore should adopt unique policies to manage them. When a country loses independence of its monetary policy, then it is not able to moderate demand shocks and the inflation rates. A country’s central bank has a function of regulating the circulation of money. The purpose of this regulation is so to prevent inflation. However, once a country joins a monetary union, its freedom to control the demand shocks is lost. For instance, the countries of the European block had to abandon their national currencies and adopt the euro.

Besides, managing a monetary union can be difficult when some countries opt to leave the union. Their exit from the union will destabilize the whole trading block. The interests of individual countries have to be considered in a monetary union; otherwise, its collapse is inevitable. The union will face imminent danger when some of the member states impose their demands on the rest of the members of the union, making a threat of exit. For instance, the exit of the United Kingdom (commonly known as Brexit) from the European Union negatively affected the block, as the rates of exchange had to be adjusted.

When a government experiences a large deficit in its budget, most of the operations that it ought to run are delayed. The budget deficit is a stalemate because the country has to borrow large amounts of money to pay for the recurrent expenditure, thus incurring an enormous national debt. Besides, the investors will be reluctant to make investment in such governments, fearing that they will not recoup them because the country’s productivity may reduce. For instance, in 2008, the federal government of the United States reported about the public debt of 39 percent of the Gross Domestic Product. The debt continued to increase, reaching about 50 percent by 2012.

Another problem that arises from a country having a deficit in its budget is that it bound to suspend some projects and services that it had been offering before. The suspension results from insufficiency of money to invest into the projects, which amount to a large percentage of the government expenditure. For instance, in the United States, the government was unwilling to finance Medicare because it required a large percentage of the expenditure, while the estimated returns were minimal.

To conclude, while trying to expand their economies and trade, many countries unite into monetary unions, which allow them to transact efficiently and conduct business under common regulations. However, monetary unions pose some challenges to its member countries, such as the loss of independence in monetary policies due to refusal from the national currency, high initial costs to procure the needed infrastructure as well as adverse effects of possible exit of some member countries from the union. Governments need to cooperate closely and do business as a block in order to strengthen their economies and sustain their future projects. It is, therefore, important to examine the challenges of managing a monetary union so that member countries do not regret joining the union and opt to exit it.