The introduction of Euro definitely affects the economies of the participating nations in the European Union. This is particularly evident in the exchange rate. The exchange rate reflects the external value of the currency, showing supply and demand. The interest rate reflects domestic supply and demand for a currency. This is often managed by a central bank. Both reflect prices, and prices carry information on the state of supply and demand in a certain economy.
Currency Fluctuations
The price signals of currency fluctuations reflect the demand for currencies. It shows information on how well the economy is performing. This information is an amalgamation of the labor market, productivity, tax rates, business climate, government policies, literacy rates, education levels and other important factors.
By moving to a monetary union and adopting the European Union or EU, the fundamental information remains the same, but expressing itself in the exchange rate is no longer possible. So it is forced to find other ways. Unemployment is one way.
If the cost of labor is higher in one part than another, adjustment of wage levels is necessary. This is much harder to achieve though since it's easier to retrench people (even in places like Germany) than to slash down wages. The cost of labor is high, and people do not want wage cuts.
The strong euro could pose a potential problem to participating economies because the domestic economic price structure is not flexible enough to react. The Euro, a single currency, has put companies into a position where they are faced with strong currency and no escape route.
Devaluations
Countries like Italy used to devaluation to counter economic woes before the Euro came to be. This method keeps the country in business, but it has its negative effects such as impoverishing the entire nation and importing inflation. But now calling off devaluation in weak times is no longer possible. Adjustment then will have to take place through other ways. This is quite hard given the environment of rigid labor markets and no structural flex.
Devaluations are not the option to choose, but regional (i.e. national) responses were still possible in the sense that national monetary policy could account for the impact of a strong currency. Economies in EU vary. Some like the Netherlands and Ireland are much more trade-oriented than others like Italy or Spain.
A strong euro creates greater impact in the countries with open economies than in those with a less international focus. EU powers must find a single interest rate to deal with the inflationary pressures and the impact of a strong currency on very different principal economies.
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