The Future of EMU:  What Does the History of Monetary Unions Tell Us?

Bordo, Michael D.; Jonung, Lars

doi:10.3386/w7365

“…This quote remains valid until today, and a number of advances in the theory and its empirical applications make it look a rather modern tool for analysing the macroeconomics of fixed exchange rates. However, some others, including Goodhart (1995) and Bordo Jonung (1999), maintain that the predictive power of the OCA theory concerning the evolution of a monetary union is rather weak. Mongelli (2002) has subdivided the development of the OCA theory into four phases:…”

Section: Traditional and Endogenous Optimum Currency Areasmentioning

confidence: 99%

“…The main arguments against the Eurozone being an OCA may be summarised as follows (Bordo and Jonung, 1999 The Eurozone is a conglomerate of countries with different development stages. With a centralised monetary policy devoted to price stability, this has led to grossly deviating real exchange rate developments and wide current account imbalances between member states.…”

Section: Theoretical and Empirical Argumentsmentioning

confidence: 99%

The Eurozone: Piecemeal Approach to an Optimum Currency Area

Handler

¹

2013

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractSoon after the establishment of the Eurozone it became obvious that the structural differences between member countries would not abate, as expected, but rather gradually widen. Although part of the problem can be attributed to the enlargement process, it also relates to asymmetric effects of the common currency and to diverging economic policies. This paper discusses the literature which associates the economic characteristics of EMU with arguments of the optimum currency area (OCA) theory and asks for missing capstones that would meliorate EMU to eventually resemble an OCA. As potential candidates for such building blocks, some sort of fiscal union and lender of last resort may qualify, drawing on the experiences of other currency unions and federal states. The financial and debt crisis has revealed that the endogenous forces within a currency union may be too slow to absorb the shocks originating from the crisis. For a currency union to survive in such a situation it is all the more important that the OCA criteria are met and/or that complementary institutions are in place. However, as actual developments in the Eurozone reveal, the political process of approaching an OCA is piecemeal rather than comprehensive and prompt. AbstractSoon after the establishment of the Eurozone it became obvious that the structural differences between member states would not abate, as expected, but rather gradually widen. Although part of the problem can be attributed to the enlargement process, it also relates to asymmetric effects of the common currency and to diverging economic policies. This paper discusses the literature which associates the economic characteristics of EMU with arguments of the optimum currency area (OCA) theory and asks for missing capstones that would meliorate EMU to eventually resemble an OCA. As potential candidates for such building blocks, some sort of fiscal union and lender of last resort may qualify, drawing on the experiences of other currency unions and federal states. The financial and debt crisis has revealed that the endogenous forces within a currency union may be too slow to absorb the shocks originating from the crisis. For a currency union to survive in such a situation it is all the more important that the OCA criteria are met and/or that complementary institutions are in place. However, as actual developments in the Eurozone reveal, the political process of approaching an OCA is piecemeal rathe...

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“…In fact, it does not make any sense for a country to encourage sanctions for countries breaching the deficit threshold if you could be the next violating the rule. By the way, this experience coincides with the policy lessons in historical monetary unions of the past two centuries (Bordo & Lonung, 1999). They even show that the break-up of past monetary unions is mainly due to the fact of poor governance.…”

Section: Flawed Institutional Incentivesmentioning

confidence: 80%

Whither European Economic Governance?

Herzog¹

2014

IJBM

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This paper develops a new governance scheme for a stable and lasting European Monetary Union (EMU). I demonstrate that existing economic governance is based on flawed incentives especially due to insufficient macroeconomic coordination, failures of institutional enforcement and animal spirit in financial markets. All this caused the European sovereign debt crisis in 2010. Consequently, the EMU crisis is not a conundrum at all rather a failure of national and supranational governance. To tackle this problem, I propose a return to flexible but compulsory rules driven by market forces. The new governance principles shall promote the compliance and effective enforcement of rules.

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“…Early on, it was recognized that the absence of coordinated fiscal policies might be a potential 'hazard area' in the construction of the EZ because of the interactions between the member states' domestic policies (Bordo and Jonung, 1999). In particular, it has been argued that member governments might be tempted to engage in moral hazard behaviour.…”

Section: Literaturementioning

confidence: 99%

The Eurozone needs exit rules

Fahrholz¹,

Wójcik²

2013

Journal of Banking & Finance

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Eurozone Needs Exit Rules Abstract This paper argues that the key issue for defining and solving the Eurozone's (EZ) difficulties lies in readjusting the relationship between the centre and the periphery of the EZ. Our argument proceeds in two steps. Firstly, the basic finance problem of a centre-periphery system is captured by a threat game with perfect but incomplete information. To get close to the essence of today's crisis we analyze to what extent a 'troubled' periphery EZ member can negotiate a bailout from the center due to the existence of a negative externality arising from its potential default. Secondly, we analyze how establishing 'exit rules', which have recently also been advocated by Jacques Delors, would shift the centre-periphery relationship in a way that safeguard the stability of the EZ. We demonstrate that such rules may help limiting the scope for brinkmanship whereby fiscal problems in one member create a negative externality for the rest of the EZ. We show that such rules will strengthen the EZ through at least four channels. Terms of use: Documents inJEL-Code: E620, F330, H770, C700.

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The Future of EMU: What Does the History of Monetary Unions Tell Us?

Cited by 83 publications

References 18 publications

The Eurozone: Piecemeal Approach to an Optimum Currency Area

The Eurozone: Piecemeal Approach to an Optimum Currency Area

Whither European Economic Governance?

The Eurozone needs exit rules

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