Advertisement

The Costs and Benefits for Joining a Common Currency with Emphasis on Weaker Member States: The Pre-Crisis Debate

  • Theodore Pelagidis
  • Michael Mitsopoulos
Chapter

Abstract

Long before the crisis, the dominant theory of an Optimum Currency Area (OCA) was that there are necessary conditions or properties for success (Mundell 1961; McKinnon 1963; Kenen 1969). The basic premise was that the fundamental requirement for a successful currency area is wage/price flexibility and mobility of factors of production as well as harmonization of economic and political institutions. This injects sufficient flexibility in the system to hedge against the so-called “asymmetric demand shocks/disturbances”. Asymmetric shocks are demand shocks or disturbances that hit two or more regions or countries with a common currency. When shocks are asymmetric, business cycles between two countries—let us assume Greece and Germany—are de-synchronized. De-synchronization of business cycles means that Greece experiences, for example, a negative growth rate along with relatively low inflation, while Germany experiences, at the same time, a high growth that goes with low unemployment. Then, the two countries need different monetary stabilization policies. Greece needs some accommodation through decreasing interest rates in order to stimulate economic activity, while Germany needs some contraction to fight an excessive inflation rate. Then, the dilemma that the European Central Bank (ECB) faces has to do with the diversified stabilization prescriptions the two aforementioned economies require.

References

  1. Abowd, J., F. Kramarz, T. Lemieux, and D. Margolis. 1997. Minimum Wages and Youth Unemployment in France and the United States. NBER Working Paper No. 6111.Google Scholar
  2. Alesina, A., R. Perotti, and E. Spolaore. 1995. The Political Economy of Fiscal Discipline. Together or Separately? Issues on the Costs and Benefits of Political and Fiscal Unions. European Economic Review 39: 751–758.CrossRefGoogle Scholar
  3. Alesina, A., E. Spolaore, and R. Wacziarg. 1997. Economic Integration and Political Disintegration. NBER Working Paper No. 6163.Google Scholar
  4. Arestis, P., K. McCauley, and M. Sawyer. 2001. The Future of the Euro. Public Policy Brief, 63, Levy Institute.Google Scholar
  5. Arghyrou, M., and G. Chortareas. 2006. Real Exchange Rates and Current Account Imbalances in the Euro Area. Paper presented at the Salt Lake City, Utah, October 2006.Google Scholar
  6. Baldwin, R. 2004. Euro’s Trade Impact. FT, July 12.Google Scholar
  7. ———. 2006. In or Out? Does It Matter? An Evidence-based Analysis of the Trade Effects of the Euro. CEPR, June.Google Scholar
  8. Baldwin, R., and V. DiNino. 2005. Euros and Zeros: The Common Currency Effect on Trade in New Goods. CEPR Discussion Papers 5973.Google Scholar
  9. Bayoumi, T., and B. Eichengreen. 1992a. Shocking Aspects of EMU. CEPR Discussion Paper Series No. 643.Google Scholar
  10. ———. 1992b. Is There a Conflict Between EC Enlargement and EMU? CEPR Discussion Paper Series No. 646.Google Scholar
  11. ———. 1994a. Restraining Yourself: Fiscal Rules and Stabilization. CEPR Discussion Paper Series No. 1029.Google Scholar
  12. ———. 1994b. One Money or Many? Analyzing the Prospects for Monetary Unification in Various Parts of the World. Princeton Studies in International Finance No. 76, September, Princeton University.Google Scholar
  13. Bayoumi, T., and P. Masson. 1995. Fiscal Flows in the United States and Canada: Lessons for Monetary Union in Europe. European Economic Review 39: 751–758.CrossRefGoogle Scholar
  14. Beetsma, R., and M. Giuliodori. 2010. The Macroeconomic Costs and Benefits of the EMU and Other Monetary Unions: An Overview of Recent Research. Journal of Economic Literature 48 (3): 603–641.CrossRefGoogle Scholar
  15. Blanchard, O. 2000. The Economics of Unemployment. Shocks, Institutions and Interactions. Lionel Robins Lectures, London School of Economics, October.Google Scholar
  16. Blanchard, O.J., and F. Giavazzi. 2002. Current Account Deficits in the Euro Area: The End of the Feldtsein-Horioka Puzzle? Brookings Papers on Economic Activity 2: 147–209.CrossRefGoogle Scholar
  17. Blanchard, O., and J. Wolfers. 1999. The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence. NBER Working Paper 7282.Google Scholar
  18. Bordo, M., and L. Jonung. 1999. The Future of EMU: What Does the History of Monetary Union Tell Us? NBER Working Paper Series No. 7365.Google Scholar
  19. Cohen, D., T. Lefranc, and G. Saint-Paul. 1997. French Unemployment: Why France and the USA Are Alike. Economic Policy, 25, October.Google Scholar
  20. Cooper, R., and H. Kempf. 2004. Overturning Mundell: Fiscal Policy in a Monetary Union. Review of Economic Studies 71 (2): 371–396, 404.CrossRefGoogle Scholar
  21. De Grauwe, P. 2001. European Monetary Union. A Project of Promise and Risk. Paper presented in the Conference: >From the Athenian Tetradrachm to the Euro, Athens, October 8–9, 2001, organized The National Bank of Greece and The Association of European Banking History.Google Scholar
  22. ———. 2005. Economics of Monetary Union. 6th ed. New York: Oxford University Press.Google Scholar
  23. Dixit, A.K., and L. Lambertini. 2001. Monetary-Fiscal Policy Interactions and Commitment versus Discretion in a Monetary Union. European Economic Review 45: 977–987.CrossRefGoogle Scholar
  24. ———. 2003. Symbiosis of Monetary and Fiscal Policies in a Monetary Union. Journal of International Economics 60 (2): 235–247.CrossRefGoogle Scholar
  25. Dunn, R. 2001. Europe Will Tighten More. Challenge. The Magazine of Economic Affairs 44 (2): 14–23.Google Scholar
  26. Eichengreen, B. 1997. European Monetary Unification: Theory, Practice and Analysis. Cambridge: MIT Press.Google Scholar
  27. Emerson, M., D. Gros, and A. Italianer. 1992. One Market, One Money. New York: Oxford University Press.Google Scholar
  28. Eurostat. 2001. EC Economic Data Pocket Book, 5. Brussels: EU.Google Scholar
  29. Feldstein, M. 1997. The Political Economy of the European and Monetary Union: Political Sources of an Economic Liability. Journal of Economic Perspectives 11 (4): 23–42.CrossRefGoogle Scholar
  30. Frankel, J., and A. Rose. 2002. An Estimate of the Effect of Common Currencies on Trade and Income. NBER Working Paper No. 7857.Google Scholar
  31. Frieden, J. 1998. The Euro: Who Wins? Who Loses? Foreign Policy, 24–40, Autumn.Google Scholar
  32. Kenen, P. 1969. The Theory of Optimum Currency Areas: An Eclectic View. In Monetary Problems of the International Economy, ed. R. Mundell and A. Swoboda, 41–60. Chicago: University Press.Google Scholar
  33. Krueger, A. 2000. From Bismark to Maastricht: The March to European Union and the Labor Compact. NBER Working Paper No. 7456.Google Scholar
  34. McKinnon, R. 1963. Optimum Currency Areas. American Economic Review 53 (3–5): 17–25.Google Scholar
  35. ———. 1994. Discussion. In The International Monetary System, ed. P. Kenen, F. Papadia, and F. Saccomani. Cambridge: Cambridge University Press.Google Scholar
  36. McKinsey & Company (Germany). 2012. The Future of the Euro: An Economic Perspective on the Euro Area Crisis. Germany: McKinsey Publishing.Google Scholar
  37. Mundell, R. 1961. A Theory of Optimum Currency Areas. American Economic Review 51 (4): 657–665.Google Scholar
  38. Obstfeld, M. 1997. Europe’s Gamble. Brookings Papers on Economic Activity 2: 241–317.CrossRefGoogle Scholar
  39. ———. 2000. Diversity Still an Option. IMF Economic Forum, IMF Survey, December 11.Google Scholar
  40. Obstfeld, M., and G. Peri. 1998. Regional Nonadjustment and Fiscal Policy. NBER Working Paper No. 6431, February.Google Scholar
  41. Pelagidis, T. 2009. Structural and Institutional Divergence. Challenge. The Magazine of Economic Affairs 52 (6): 101–113.Google Scholar
  42. Ramaswamy, R., and T. Sloek. 1997. The Real Effects of Monetary Policy in the European Union: What Are the Differences? IMF Working Paper No. 160.CrossRefGoogle Scholar
  43. Rose, A. 2000. One Money, One Market: Estimating the Effects of Common Currencies on Trade. Economic Policy 30: 7–46.Google Scholar
  44. Rose, A., and C. Engel. 2000. Currency Unions and International Integration. NBER Working Paper No. 7872.Google Scholar
  45. Rose, A., and T.D. Stanley. 2005. A Meta-Analysis of the Effect of Common Currencies on International Trade. Journal of Economic Surveys 19: 347–365.CrossRefGoogle Scholar
  46. Rose, A., Z. Darvas, and G. Szapary. 2005. Fiscal Divergence and Business Cycle Synchronization: Irresponsibility Is Idiosyncratic. In NBER International Seminar on Macroeconomics 2005, ed. J. Frankel and C. Pissarides. Cambridge, MA: MIT Press.Google Scholar
  47. Sala-i-Martin, X., and J. Sachs. 1991. Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from United States. NBER Working Paper No. 3855.Google Scholar

Copyright information

© The Author(s) 2017

Authors and Affiliations

  • Theodore Pelagidis
    • 1
  • Michael Mitsopoulos
    • 2
  1. 1.NR Senior FellowBrookings InstitutionWashington, DCUSA
  2. 2.Hellenic Federation of EnterprisesAthensGreece

Personalised recommendations