THE EMU: THE OPTIMAL CONDITIONS FOR A COMMON CURRENCY

Jacob Tobias Kirkegaard Olsen

Studenteropgave: Masterprojekt

Abstrakt

After the ratification of the European Single Act, the European Council decided to explore the options to create a European economic and monetary union. After having established a committee and a Commission working group both emphasizing the economic gains that could materialize if the European Union is successful in establishing an Economic and Monetary Union (EMU), the European Council decided to go ahead with a three phased approach to gradually introduce a common currency.
The gradual introduction to the EMU should help regions coordinate and integrate markets for products, services and capital, so that over time, they will develop similar business cycles. In order to facilitate this process, the European Council agreed to a common set of criteria that regions should live up to, in order to adopt the final phase of the EMU, the common currency. The institutionalization of these criteria indicates that national policy-makers were willing to transfer autonomy to the EU, in order to gain economically. This decision would be shielded by an institutional lock-in, meaning that subsequent politicians is unable to reverse the transfer of autonomy.
Most region within the EMU did not live up to the criteria for adopting the euro for an extended period following the financial crisis, thereby indicating that business cycles were unaligned. This is likely the cause of natural asymmetries occurring between EMU regions, thus necessitating some kind of economic counter response. The Optimum Currency Area theory suggests a couple responses that might help counter asymmetric shocks.
The first step is labour mobility. If a region is struck by an asymmetric shock, has to reduce relative wages. If the region benefits from a high degree of labour mobility, then the emigration of workers will reduce relative wages.
The second step is fiscal integration. If an asymmetry occurs within a currency area, then regions that a profiting can help alleviate asymmetrical problems by fiscal transfers.
A third option is to further the progress of integrating financial markets. If financial markets are properly integrated, then money flows will adjust for regional asymmetries if investors are risk adverse.

UddannelserInternational Public Administration and Politics, (Bachelor/kandidatuddannelse) Kandidat
SprogEngelsk
Udgivelsesdato31 maj 2018
Antal sider31
VejledereJesper Jespersen

Emneord

  • emu
  • optimum currency area
  • labour mobility
  • integration of financial markets
  • fiscal integration
  • neofunctionalism