Does Europe look like an optimal currency area?
Barry Eichengreen argues that after the introduction of the Euro:
- Positive supply shocks raise output but also raise prices;
- Positive demand shocks appear to reduce prices.
- Shocks are still asymmetric and adjustment remains difficult (no fiscal federalism, lower levels of labor mobility);
- There is a capital-flow problem: while the € had positive efficiency effects, that positive supply shock unleashed large capital flows between Northern and Southern Europe, inflating asset prices in the South.
The Euro and the Theory (and Practice) of Monetary Unions
Author: Barry Eichengreen
From: University of California, Berkeley
Is the optimal currency areas model useful for the EMU?
Probably not, argues Lucrezia Reichlin because:
- It does not take into account the role of monetary policy credibility (nominal convergence);
- Does not deal with countries growing at different rates (catch-up dynamics);
- Does not deal with financial disruption.
The Euro and the Theory (and Practice) of Monetary Unions – Discussion
Authors: Lucrezia Reichlin
From: London Business School
Lessons from history
History suggest that currency unions and political (fiscal) integration go hand in hand. It is possible to form currency unions that are less politically integrated, but such unions are more resembling fixed exchange rate systems managed by independent central banks. The EMU today is in some ways a hybrid since monetary policy is centralized in the hands of an independent central bank (ECB) but there is a very limited degree of fiscal integration and each country is supposed to fend for itself in the struggle to remain in the Union.
Author: Anders Ögren
From: Lund University