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lets now apply the theory of optimum currency areas which we discussed in a previous video lets apply it to the euro recall that the benefits of a common currency are a lower more stable inflation rate lower interest rates and increased trade notice that these benefits applied most in Europe to the smaller periphery economies to Portugal to Ireland to Greece to Spain they did not apply to Germany Germany for example already had a low and stable inflation rate they had low interest rates and being one of the largest economies they didnt need increased trade so much as the smaller economies so Germany was in the Euro for political reasons not for economic reasons and that would turn out to have implications later the cost of the common currency no independent monetary policy and a lesser ability to respond to shocks lets take a closer look at these costs so when are the costs of a common currency likely to be large well remember a key cost of having the same currency as another count
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