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$70000 at a certain date then they can use a futures contract to make sure they can exchange it for the current exchange rate of $1,75/£, meaning they’ll get exactly £40000 .

This argument is partially true. It is indeed true that the existence of such financial market instruments substantially reduces the costs of exchange rate risks, but it does not eliminate them. To begin with, to use such instruments you have to pay the person who takes on the risk premium, which means that there is a extra cost compared to if you were trading within a currency zone. Secondly, it is often difficult or impossible for small businesses and non-wealthy individuals to use them, so for them the currency risks remain. Thirdly, these instruments are mainly available for transactions in the near future (next 6 to 12 months). Long term protection against currency risks are very difficult even for big companies to obtain since investors demand higher premiums and since companies, in most cases, aren’t sure how big their cross-border transactions are. Thus, it is only short-term fluctuations that people can insure themselves against. Long-term fluctuations, which are clearly more important for companies making long-term investments in factories or research and development, are still present.

This is important because opponents of the euro in countries with national currencies, such as Sweden and the U.K. , often point to the boost to the export sector from a weaker currency20. While it is true that a weaker currency will at least in the short term increase profits at export companies, they will likely not want to make any long term investments to take advantage of that because they can’t be sure that this favorable exchange rate will really last.

So how important is this? How much damage does transaction costs, decreased transparency and exchange rate risks create? A study by Harry Flam and Håkan Nordström21 indicated that the introduction of the euro had boosted trade by 13-14% between 1998 and 2005. And there are actually reasons to believe their study might have underestimated the effect. First of all, they've statistically accounted for differences in economic growth. While that is basically valid

20 See for example here: http://www.telegraph.co.uk/finance/comment/rogerbootle/3760449/Ignore-the-europhiliac- chorus---we-need-the-pound-now-more-than-ever.html h t t p : / / w w w . k o m m e r s . s e / u p l o a d / A n a l y s a r k i v / A r b e t s o m r % E 5 d e n / E U s _ i n r e _ m a r k n a d / E u r o _ fl a m _ n o r d s t r o m _ s v e n s 21 k . p d f


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