Costs and Benefits of Monetary Union

What are the costs and benefits of European monetary union? Advocates of monetary union ‘see important benefits. Under a common currency, exchange-rate volatility within Europe will be reduced to zero; so trade and finance will no longer have to contend with the uncertainties about prices induced by changing exchange rates. The primary result will be a reduction in transactions costs among countries. To the extent that national financial markets are segmented, moving to a common currency may Iowa more efficient allocation of capital-across countries. Some believe that firm macroeconomic discipline will be preserved by having an independent European central bank committed to strict inflation targets. Perhaps the most important benefit may be political’ integration and stability of Western Europe~ a continent at peace for half a century after being at war with itself for most of recorded history.

Most economists believe that the United States is an optimal currency area. When the United Stares is faced with a shock that affects the different  asymmetrically, labor migration tends to restore balance. For example, workers left the hard-hit northern states and migrated to the oil-rich southwestern states after the oil shocks of the 1970s.

European Monetary Union is one or’ history’s great economic experiments. Never before has such a large and powerful group of countries turned its economic fortunes over to a multinational body like the European Central Bank, Never before has a central bank been charged with the macroeconomic fortunes of a large group of nations with 300 million people producing $7 trillion of goods.and services. While optimists point to the microeconomics benefits of a larger market and lower transactions costs, , skeptics  that monetary union threatens stagnation and unemployment because of the lack of price and wage flexibility and insufficient labor among countries, All will be watching this important economic innovation.

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