Common currency area (currency union or monetary union)

The European Economic Monetary Union (EMU) 19 members

The Maastricht Treaty of 1992 :
o Government debt < 60% of GDP
o Government budget deficit <3% of GDP
o Inflation around 2%
o Interest rates on long term Government bonds
The European union: main aim was peace
The single European market was the second aim in establishing the EU
o Free movement of goods, services, labour and capital
o EMU is part of the Single European Market Project
The following 4 goals should be achieved
o Free movement
o Approximation of relevant laws and administrative provisions between member
states
o A common eu wide competition policy
o
Benefits of single currency
o Elimination of transaction costs
o Reduction in proce discrimination: transparent prices and market
o Reduction in foreign exchange rate
Costs
o A country joining a currency union gives up its freedom to set its own monetary
policy
o No macroeconomic adjustments through movements in the external value of the
domestic currency
Asymmetric shock policies
o Decrease prices
o Decrease wages
o Transfer capital
o Increase efficiency
o Move labour
Symmetric shock
Optimum currency area a group of countries
Characteristics
o Real wage flexibility
o Labour mobility
o Capital mobility
o Symmetric shocks
The benefits can be more realised when there is high degree
Is Europe an optimum currency area? We need to look at the degree of:
o Trade integration
o Real wage flexibility we do not have this in the EMU
o Labour mobility not high in the EMU
o Financial capability mobility Wholesale Money Market is very mobile, Retail
Money Market is not mobile
o Symmetric Demand Shocks doesnt have this
 No clear cut answer, economic cycles are broadly synchronised, somewhat different growth
rates during GFC. Okay on the financial mobility, but less good on labour mobility and wage
flexibility.