Abstract
The coronavirus crisis has caused new distress in the European Economic and Monetary Union (EMU), as the southern part of the EMU has been hit stronger than the northern part. The common currency prevents nominal exchange rate adjustment in response to the asymmetric shock. Policymakers have therefore taken recourse to large-scale financial transfers. Based on the lessons from the German monetary union, this article proposes instead the introduction of parallel currencies to facilitate relative price changes. Parallel currencies in the south would allow an increase in competitiveness of the south via real depreciation. The introduction of a parallel currency in Germany would lead to capital inflows and a real appreciation of the new German mark. The pre-EMU pressure for structural adjustments and productivity gains would be restored.
Highlights
The coronavirus crisis has caused new distress in the European Economic and Monetary Union (EMU), as the southern part of the EMU has been hit stronger than the northern part
Asymmetric shocks in a monetary union can be softened by targeted credit from the European Central Bank (ECB) or other unconventional monetary policy operations (Sonnenberg and Schnabl, 2019)
We build upon the experience of the German monetary union
Summary
The coronavirus crisis has caused new distress in the European Economic and Monetary Union (EMU), as the southern part of the EMU has been hit stronger than the northern part. The €750 billion Generation EU plan, which was announced as “a magnificent signal of solidarity and willingness to reform” (European Commission, 2020a) may bring temporary relief, but it will not address the main problem of the euro area: real economic divergence This has been further aggravated by other coronavirus countermeasures, including border closures that have interrupted tourist flows to southern European countries for a prolonged and indefinite period of time. We explore the potential for parallel currencies to introduce more flexibility into the EMU set-up with a view to softening real economic divergence. For this purpose, we build upon the experience of the German monetary union
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