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posted on 24 April 2016

Consequences Of The Euro: Monetary Union, Economic Disunion?

from the Dallas Fed

-- this post authored by Enrique Martinez-Garcia and Valerie Grossman

Forming a monetary union brings the benefits of a shared currency but also - as the experience of the euro area shows in the years following the global financial crisis - significant costs associated with the loss of monetary policy independence and exchange rate flexibility.

Nineteen countries in the European Union have adopted the euro since 1999, surrendering independence over their monetary policy with the expectation that commercial and political ties would deepen.

A monetary union can lower transaction costs and increase price transparency and competition, creating trade and financial opportunities. Countries reap these benefits based on their ability to exploit them. Similarly, the loss of monetary policy independence affects some countries much more than others.

Experience suggests that the euro area is far from the "optimal currency area" economists envisioned in the 1960s and that its advocates foresaw. Among the reasons: diverging business cycles across member countries, wage (and price) rigidities and limited mobility of labor and capital between euro economies.

[click on image below to continue reading]

Source: research/ eclett/ 2016/ el1602.pdf

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