View your shopping bag

Items: (0) £0.00
  • €
  • $
  • £

Checkout

Benefits and costs from monetary union

At the end of last week, Francesco Paolo Mongelli, Professor at the University of Frankfurt, published a brief article entitled “Some benefits and costs from participating in a monetary union.”

In his conclusion he says that: “There is a broad range of benefits and costs in sharing a currency. Contrary to conventional wisdom, the macroeconomic costs of losing influence over macroeconomic stabilisation by relinquishing direct control over monetary policy and the exchange rate are more contained than previously feared. Moreover, the euro has spurred macroeconomic stability and financial integration. The latter will increasingly foster financial-based risk sharing. There is also evidence of a wide range of microeconomic gains in terms of improved microeconomic efficiency, and of broadly positive external effects.

What are the costs and benefits of monetary union?

“An underlying temporary asymmetry is not receiving enough attention. Some costs are incurred at the start of monetary unification, such as the changeover cost and the investment to set up a sound institutional framework. Instead, some benefits accrue gradually as the new currency gains acceptance, its circulation widens, as economic and financial integration deepen, and as economic governance consolidates. In other words, time plays an important role.

“Despite evidence of further integration over the last decades, Eurozone countries are still quite heterogeneous and are likely to remain so for the foreseeable future. It is unlikely that differences in legal systems, financial structures, and various other domestic characteristics, institutions, and preferences will rapidly fade out. Is that a problem? Various commentators have argued that heterogeneity should not be overstated. Moreover, financial based risk sharing will increasingly contribute to smoothing asymmetric shocks.

“We have also learned that the costs of slow dynamic adjustment are far above all other costs. It is also still poorly researched and poorly explained to the general public. In essence, this is a cost from not undertaking structural reforms and liberalisations. For many countries, reforms were postponed for too long and would have been even more complex to undertake without the euro: i.e., assuming that peer-pressure and market discipline help. In other words, opportunities should be seized.

“Recent events are showing that what has been achieved by the EMU cannot be taken for granted, but needs instead to be nurtured. The EMU needs new economic governance with broad ownership and an assessment of how systemic risks have now changed and are still changing. In particular, fiscal governance must be revisited in various ways. Hence, perseverance also plays an important role for the success of the EMU.

 To reach the full article click here.

Tags: , , , ,
Posted in European Union, eurozone, macroeconomic policy, Microeconomics, Monetary Union

Leave a Comment

*
(will not be published) *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>