European Monetary Integration Research Articles

Optimum currency area in Europe: an alternative assessment

In this paper we explore an alternative scheme to assess the suitability of adopting a common currency by Western European countries. It is based on the role of common regional shocks in the determination of output. The results show that the OCA theory well explains and predicts participation decisions in EMU. We also find that our OCA index is highly consistent with two popular schemes that have been introduced by Bayoumi and Eichengreen [in: F. Torres, F. Giavazzi (Eds.), Shocking Aspects of European Monetary Integration. in Adjustment and Growth in the European Monetary Union, Cambridge University Press, Cambridge (1993); European Economic Review 41 (1997) 761–770].

Odd man out: rethinking British policy on European monetary integration

This article examines British preferences on European monetary integration. It challenges dominant theories of preference formation, suggesting an alternative explanation focusing on governmental majority. Empirical evidence is presented on both UK economic behaviour and the views of domestic economic interests, as well as government majority. The article also analyses first and second-hand accounts of the main players involved in three cases: the decision not to join the Exchange Rate Mechanism in 1979, the decision to join the ERM in 1990, and the decision to opt out of stage 3 of Economic and Monetary Union.

Fiscal policy and monetary integration in Europe

A popular view among economists, policymakers, and the media, is that the Maastricht Treaty and then Stability and Growth Pact have significantly impaired the ability of EU governments to conduct a stabilizing fiscal policy and to provide an adequate level of public infrastructure. In this paper, we investigate this view by estimating fiscal rules for the discretionary budget deficit over the period 1980-2002, using data on EMU countries and control groups of non-EMU EU countries and other non-EU OECD countries. We do not find much support for this view. In fact, we find that discretionary fiscal policy in EMU countries has become more countercyclical over time, following what appears to be a trend that affects other industrialized countries as well. Similarly, we find that the decline in public investment experienced over the last decade by EMU countries is part of a world-wide trend that started well before the Maastricht Treaty was signed.

The productivity-bias hypothesis and the PPP theorem: new evidence from panel vector autoregressive models

In this paper, we use panel vector autoregressive models to test both the purchasing power parity (PPP) relation and the productivity-bias hypothesis for Sweden vis-a-vis nine of its major trading partners (Denmark, Finland, France, Germany, Italy, Japan, Norway, the UK, and the US) for the period 1973–1999. The departure from earlier studies of the productivity-bias hypothesis and the PPP theorem is in the asymptotic theory of panel co-integration allowing for multiple co-integrating vectors. It has been demonstrated that the weak version of PPP receives strong support. Our findings also show that in the Euro-country cases, the deviation of PPP from the equilibrium exchange rate has a long-run relationship with the productivity ratios, implying that as Sweden becomes relatively more productive, the Swedish SEK appreciates in real terms. The results have policy implications for monetary integration in Europe, and in particular for Swedish participation in the European Monetary Union (EMU).

Yen or Yuan? China's Role in the Future of Asian Monetary Integration

Most proposals for Asian monetary cooperation assign a special role to the Japanese yen as an anchor currency. We focus instead on the potential role of the Chinese renminbi. It becomes increasingly clear that China will assume the role of the dominant economy in the region, and that it will become a more important destination for Asian products than Japan in as little as five years. This development should assign a special role to the Chinese currency and its exchange rate to the other Asian currencies. It is rather unlikely that the renminbi will assume a dominant role immediately but by drawing comparisons with the European monetary integration process, it seems possible to design a system in which most of the present currencies have a role, but where the relative weights shift over time. The evolution of the ERM is a model for the process of Asian monetary integration.

European Monetary Integration and the ‘Constitutionalization’ of Macroeconomic Policy Making

This work discusses the ‘constitutionalization’ of rules in macroeconomic policy-making in the European Union (EU) with reference to European monetary integration. The analysis deals with two main monetary arrangements, the European Monetary System (EMS) and the Economic and Monetary Union (EMU), and focuses on one country - Italy. Using an interdisciplinary perspective and a constitutional political economy approach, three sets of factors are identified to explain how and why policy-makers may decide to self-limit their sovereignty in monetary and fiscal policies, as they have done in the process of European monetary integration. It is argued that such factors influenced the dynamics and evolution of the European monetary arrangements, shaping the path to EMU.

From Hard Currency Policy to Monetary Union

In the wake of monetary integration in Europe, Austria abandoned the tested hard currency policy (HCP) for joining EMU as a member. The final target of monetary policy and real sector adjustment needs are similar in both regimes, and the HCP may therefore be viewed as a convenient, training camp, for later EMU accession. Georg Winckler devoted a number of essays on the critique, but also on the analytical foundation, of the HCP. The current paper takes up some of the strands developed by him, and reviews the implications on Austria's monetary strategy of the changeover to EMU. At EMU level it was required to newly establish credibility and accountability of the monetary authorities. Towards this end, the ECB emitted harsh signals to be committed to its primary task of maintaining price stability, and it was therefore held accountable for neglecting real sector developments as well as potential threats of deflation. This is unjustified, given the circumstances the ECB has been faced with since its inception, including the marked swings in the dollar value of the euro. The ECB could be blamed, however, for the lack of transparency with regard to its monetary strategy (which it declines to be, inflation targeting): it resorts to a rather vaguely defined final monetary target, it does not observe an intermediate target, and it is by no means clear what purpose the reference value for money growth does serve. The paper concludes that in Europe there is no immediate danger that the goal of price stability could unintentionally end up in deflation.

West African Currency Unions: Rationale and Sustainability

Drawing on the recent literature and experience of monetary integration in Europe, the paper examines the rationale for establishing regional currency unions in western Africa. Despite dramatic economic, political and historical differences between the two regions, the analysis indicates that monetary unification might well be benefi- cial for a number of the member states of the Economic Community of West African States (ECOWAS). The main reason is that the costs stemming from the loss of mone- tary autonomy are often more than offset by the gains originating in the (partial) separation of monetary and fiscal powers. However, large countries with relatively ambitious public expenditure objectives would not be attractive partners because they would be expected to pressure the common central bank, creating excessive inflation in the entire union. Hence, the desirability and sustainability of a currency union critically depends on fiscal discipline among its members. We also explore the vulnerability of regional monetary institutions to country-specific disturbances. Overall, the desirability of an ECOWAS monetary union requires a strong fiscal surveillance procedure both in the transition phase and after the establishment of the union. (JEL E58, E61, F42)

How has the European Monetary Integration Process Contributed to Regional Financial Market Integration?

European monetary integration was one element in the process of financial market integration but by far not the only one. The paper traces the development of financial markets and systems in Europe from the beginnings of the euromarkets in the 1950s over early exchange rate arrangements and the establishment of the Single Market program to the launch of the euro and its effects. Not surprisingly, the contribution of the common currency to financial integration has been the stronger the more national markets have in common and the greater the importance of currency risk as discriminating factor. It has been most successful in the interbank market for very short-term unsecured deposits and in markets for bonds and derivatives, and played a lesser role for collateralised instruments and equities where differences in institutions and systems as well as cultural aspects impose stronger impediments. Experience has shown that in the process of financial integration a common currency is no substitute for the removal of institutional barriers and other obstacles hindering the free move of financial institutions and services. And, it cannot compensate for the specific information about individuals, firms and products required in some market segments that is a lasting impediment to full integration.

The process of european monetary integration: a comparison of the belgian and italian approaches

This paper analyses and compares the roles which Belgium and Italy have played in the process of European monetary integration. It discusses Belgian and Italian attitudes towards European integration and EMU, exchange rate policies, key concepts of the Belgian and Italian EMU strategies and the concrete contributions made by Belgium and Italy. Overall, these two countries played an important and pace-setting role in the process of European monetary integration. They developed several creative and diplomatic proposals. Moreover, Belgian and Italian policy-makers often acted as policy entrepreneurs and proved to be skilful negotiators. The main difference is that Belgium has been a constant and consistent pace-setter in monetary matters, from the preparation of the Hague Summit to the elaboration of the EMS, the monetary chapter in the Single European Act and the realisation of EMU, whereas Italy was mainly active in the 1980s. This assessment of the Belgian and Italian contributions does not challenge the decisive impact of the Franco-German axis, but illustrates that EMU was a multilateral process. Furthermore, the paper shows how important it was for a country to achieve a sound economic performance, especially a stable exchange rate, in order to have influence on the European monetary scene.

Il processo di integrazione monetaria europea: un confronto tra gli approcci belga e italiano (The Process of European Monetary Integration: A Comparison of the Belgian and Italian Approaches)

This paper analyses the roles which Belgium and Italy have played in the process of European monetary integration. It focusses on Belgian and Italian attitudes towards European integration and EMU, exchange rate policies, key concepts of the EMU strategies and concrete contributions. Overall, Belgium and Italy played an important and pace-setting role in the process of European monetary integration. The main difference is that Belgium has been a constant and consistent "pace-setter" in monetary matters, whereas Italy was mainly active in the 1980s. Furthermore, the paper shows how important it was for a country to achieve a sound economic performance, especially a stable exchange rate, in order to have influence on the European monetary scene. JEL Codes: F31, F36 Keywords: EMU, Exchange Rates, Integration

Continental Shift? An Analysis of Convergence Trends in European Real Estate Equities

This article is the winner of the International Real Estate Investment/Portfolio Management category (sponsored by LaSalle Investment Management) presented at the 2002 American Real Estate Society Annual Meeting.This study investigates the effects of European monetary integration on the behavior of stock returns in European real estate companies from the perspective of a dollar-denominated investor. A range of statistical tests is applied to assess changes in segmentation, co-movement and causality. The results suggest that, relative to the wider equity markets, the dispersion of performance is higher, correlations are lower and a common contemporaneous factor has much lower explanatory power whilst lead-lag relationships are stronger. Less and slower integration is attributed to the relatively small size of the real estate securities market and the local nature of many real estate companies' portfolios.

Productivity and Real Exchange Rates: Some Empirical Examples

This paper examines the relevance of the Balassa-Samuelson productivity-bias hypothesis for explaining long-run permanent shocks in the real exchange rates. The sample consists of yearly data on real exchange rates and productivity for six OECD countries. On the basis of Johansens maximum likelihood tests and VECMs, we find little support for the hypothesis. Our results provide a weak support for monetary integration in Europe.  JEL Classifications: E31, F31, F41, C32

The Logic of Collective Responsibility in European Monetary Integration

Although European Monetary Union led to the creation of one of the world's most independent central banks, politics has not been removed from monetary integration. The European Central Bank's primary claim to legitimacy rests with its ability to deliver low inflation and presumably higher growth. Its independence may be insufficient for this task, making its relationship with political institutions like the Euro-12 and European Parliament more important over time in order to augment its own credibility. This article argues that a model of collective responsibility is more appropriate than one of principle-agent theory to describe the development of European monetary relations between the various institutions as they will need to rely on one another if a coherent European monetary policy is to take shape.

Social democracy and monetary union

List of Figures List of Tables Contributors Acknowledgements Chapter 1. Introduction Ton Notermans Chapter 2. French Social Democracy and EMU: Presidential Prose and its Pitfalls George Ross Chapter 3. The British Labour Party and Monetary Union Andrew Gamble and Gavin Kelly Chapter 4. The German Social Democrats and Monetary Union Ton Notermans Chapter 5. European Monetary Union and the Spanish Left Carles Boix Chapter 6. Finnish Social Democrats and EMU Jukka Pekkarinen Chapter 7. The Swedish Social Democratic Party 149 Nicholas Aylott Chapter 8. Pleasing th Voters or Maximising Influence? The Danish SDP and European Monetary Integration Jens Henrik Haahr Chapter 9. The Austrian Social Democratic Party Pal Veiden Chapter 10. Dutch Social Democracy and EMU Jos de Beus Chaprter 11. Conclusions Ton Notermans Bibliography Index

German Interests in European Monetary Integration

This article explores the sources of the German govermnent’s position on European monetary integration since the first attempt at monetary union. I argue that German policy on European monetary integration was, until after EMU, driven by German foreign policy elites’ perception that integration could be used to achieve their primary geo‐political goal, embedding Germany in European institutions to dismantle the security dilemma with its European neighbours, particularly with France. After the signing of the Maastricht Treaty, this situation was reversed, as domestic economic interests and state financial authorities have taken the lead in shaping Germany’s policy on European monetary integration, with foreign policy elites playing a secondary role. Thus German policy has come to resemble more the policies of other European monetary union member states, in that domestic economic concerns have taken precedence over geo‐political interests in the making of policy on European monetary integration.

The Single European Currency and implications of labour market imperfections

Britain’s decision to reject membership of a Single European Currency – the Euro – remains a focal point of contemporary political and economic debate. Both the Danish vote to reject the Euro and the latter’s slide in value have resulted in some anxious moments for those politicians and commentators who previously confidently predicted a rosy future for European monetary integration and stronger trade patterns. At a time when Britain still ponders over the decision of whether or not to join “Euro land” some serious questions need to be asked about the Single Currency’s impact on future economic prosperity, growth patterns and employment. This paper concentrates on monetary adjustment mechanisms in the absence ofa flexible exchange rate regime. It addresses the potential implications of productivity differentials and labour market imperfections, particularly by reference to a lack of European labour market mobility and the impact of European productivity differentials. Using particular aspects of the Scottish labour market, the paper concludes with an assessment of the Single European Currency’s impact on the Scottish economy and highlights the importance of “tradable skills” rather than mobile workers.

Real Sources of European Currency Policy: Sectoral Interests and European Monetary Integration

In the thirty years before Economic and Monetary Union was achieved, European currency policies varied widely among countries and over time. In this article, I argue that the sectoral impact of regional exchange-rate arrangements, in particular their expected real effects on European trade and investment, exerted a powerful influence on the course of European monetary integration. The principal benefit of fixing European exchange rates was facilitation of cross-border trade and investment within the European Union (EU); the principal cost of fixed rates was the loss of national governments' ability to use currency policy to improve their producers' competitive position. Empirical results indeed indicate that a stronger and more stable currency was associated with greater importance of manufactured exports to the EU's hard-currency core, while depreciations were associated with an increase in the net import competition faced by the country's producers. This suggests a powerful impact of real factors related to trade and investment, and of private interests concerned about these factors, in determining national currency policies.

Taux de change et régions : un cadre conceptuel pour anticiper l'euro

Résumé L’impact à long terme du taux de change est différencié selon les régions qui composent une économie nationale ou une zone monétaire. Cependant, peu de travaux théoriques ou empiriques se sont attaqués à cette question. D’un côté, la théorie standard du commerce international considère généralement l’espace national comme homogène. De l’autre côté, les travaux sur les systèmes de production régionaux n’intègrent pas ou peu des variables macro-économiques comme le taux de change. Dans une perpective complémentaire, MUNDELL (1961) considérait qu’une zone monétaire optimale devait réunir des régions réagissant de manière symétrique aux chocs externes, sans quoi des coûts d’ajustement importants sont encourus par les régions défavorisées. Cette idée est fondamentale. Cependant, cet article explore plutôt sont corollaire. Étant donné qu’une monnaie est utilisée par un ensemble de régions réagissant de manière asymétrique à l’évolution du taux de change, comment ces régions en seront-elles affectées à long terme ? Une typologie des effets attendus est construite. Ces questions sont essentielles dans le contexte de l’intégration monétaire européenne afin de comprendre la manière dont réagiront des systèmes de production réels qui ne pourront plus miser sur les adaptations par les taux de change qui se produisaient dans le passé au sein du marché européen.

The European Monetary Union: were there alternatives to the ECB?: A quantitative evaluation

There is a large and growing literature on the benefits and cost of European Monetary Union (EMU) in Europe. Much of the literature is theoretical in nature with very little empirical evaluation of the magnitudes of effects. This paper places some quantitative magnitudes on the scale of some issues in European monetary integration. It uses the European version of the MSG2 multicountry model to evaluate the variance of a number of European variables in the faces of shocks to money markets, fiscal policy, and total factor productivity under three alternative European monetary regimes: (1) an EMU with a European Central Bank (ECB) setting monetary policy, (2) the earlier European Monetary System (EMS), and (3) a system of floating exchange rates within Europe. For each type of shock, we consider the adjustment to global shocks, European-wide shocks, shocks in Germany, and shocks in Europe excluding Germany. Within the constraints of each monetary regime, we allow any unconstrained monetary instruments to be set either cooperatively between European countries and noncooperatively where each country is allowed to set their policy instruments to maximize an objective function. We find that no monetary regime consistently dominates for all shocks, and regimes are ranked differently across European economies for the same shock. Abstracting from the serious question of policy credibility, this suggest that maintaining some flexibility in the setting of monetary policy in countries could potentially be invaluable to facilitate smooth adjustment to global, regional, and country specific shocks.