Abstract
For many experts the true motivation behind the introduction of a single currency in Europe is political rather than economic. This view is based on the fact that the euro area does not constitute an optimal currency area and, therefore, the costs of monetary integration are likely to outweigh the benefits. In particular, the loss of control over monetary policy and exchange rates make overcoming asymmetric demand-side shocks very painful. Moreover, the monetary union lacks a common fiscal authority that could help in smoothing out business cycles. The present crisis exposed these vulnerabilities and, unfortunately, so far economic policies adopted in the region have failed to rectify these shortcomings.
Highlights
Hungary, a country that joined the European Union (EU), but not the monetary union, was denied any support; it had to call on the International Monetary Fund (IMF) for help
Many economists claim that the monetary union in Europe is a political rather than an economic enterprise, because the region does not meet Optimum Currency Area (OCA) requirements, has low labor mobility and lacks a central fiscal authority
The euro area is prone to asymmetric demand-side shocks and lacks effective defenses against such adverse developments, except for deflation
Summary
Potential economic costs to a monetary union may be high in the face of adverse asymmetric demand-side shocks, i.e. disturbances that affect only certain industries or geographic regions, like the present financial crisis. The relative underperformance of the euro area (17 countries), as compared to that of the United States, presents some evidence that the establishment of a single currency hamstrung the European economy (Table 1). These developments confirm trends that have been in place since the very beginning of monetary integration (Kazimierz Dadak 2008, see Figure 1). Kenen (1969), Paul Krugman (1993) and De Grauwe (2000), among others, stress that a high degree of labor mobility and, what is called “fiscal federalism”, are very helpful in overcoming harmful effects of asymmetric shocks. A country that on the basis of past experiences may be a poor candidate for entry into a monetary union ex post may meet the OCA criteria
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