Building a Monetary Union in Europe: is it worthwhile, where do we stand, and where are we going?
Series: Working Papers. 9412.
Author: José Viñals.
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Abstract
This paper discusses the building of a Monetary Union in Europe (EMU), and in so doing, addresses three key questions: Is it economically beneficial? Where does it stand at present? And where is it going?
The first question refers to the costs and benefits of EMU. While the paper concludes that EMU is likely to be beneficial for the Community as a whole, the countries which will profit the most are those whose economies are more diversified, more integrated in commercial and financial terms and, most importantly, those whose goods and labour markets are freer from structural rigidities.
The second question addressed concerns the transition to EMU during Stage Two. It is concluded that only by strengthening policy-coordination among member countries, and by implementing the necessary changes to safeguard the cohesion of the ERM in the presence of speculative attacks, will it be possible to maintain monetary and exchange rate stability in an environment of liberalized capital flows. The recent creation of the European Monetary Institute and the automatic introduction by the Treaty of Maastricht of a number of changes in the economic and financial framework during the transition may facilitate achieving the above objectives.
The third question refers to the design of the future European monetary policy. Since the whole balance between the costs and benefits to be obtained from EMU depends critically on the anti-inflationary orientation of the future monetary policy to be conducted by the European System of Central Banks, the paper analyses the role of central bank independence as well as the complexities involved in moving to a single European monetary policy. The pros and cons of different alternatives for formulating and executing the European monetary policy are discussed.