EMU: Risky But Worth It

STOCKHOLM: Europe is now preparing for a new currency - the euro. Advocates of EMU argue that adoption of a single currency will have many positive effects, both at the micro and the macro level. At the “micro” level, the transaction costs and uncertainties imposed on all businesses by the daily exchange of one currency for another are supposed to decrease, delivering large gains in efficiency as a result. At the “macro” level, the main effect is assumed to be lower interest rates, with positive effects on European investment and economic growth.

Although these positive effects might be substantial, few professional economists see them as sufficient to motivate the abolition of today’s exchange rate system. Most economists point out that Europe is not an optimal currency area. This is mainly because the region’s labor market is too rigid and thus unable to handle external shocks. The European labor force is extremely immobile and continental labor unions are very conservative. If, for example, one region or country in a future European currency area is badly affected by, say, a relative fall in the prices of their exports, and workers refuse to either move to where there are jobs, or adjust their salaries (downward) to the new situation, a rise in unemployment is unavoidable.

Thus, as it stands today, EMU could be compared to a pressure cooker without any relief valve built in. There are, no doubt, substantial risks of increased unemployment in the backwash of monetary unification, particularly when you factor in the already high unemployment levels in most European countries. So, given the weakness of many governments, the probability that the whole EMU project will collapse is very great.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.

required

Log in

http://prosyn.org/fcf3tcX;
  1. Patrick Kovarik/Getty Images

    The Summit of Climate Hopes

    Presidents, prime ministers, and policymakers gather in Paris today for the One Planet Summit. But with no senior US representative attending, is the 2015 Paris climate agreement still viable?

  2. Trump greets his supporters The Washington Post/Getty Images

    Populist Plutocracy and the Future of America

    • In the first year of his presidency, Donald Trump has consistently sold out the blue-collar, socially conservative whites who brought him to power, while pursuing policies to enrich his fellow plutocrats. 

    • Sooner or later, Trump's core supporters will wake up to this fact, so it is worth asking how far he might go to keep them on his side.
  3. Agents are bidding on at the auction of Leonardo da Vinci's 'Salvator Mundi' Eduardo Munoz Alvarez/Getty Images

    The Man Who Didn’t Save the World

    A Saudi prince has been revealed to be the buyer of Leonardo da Vinci's "Salvator Mundi," for which he spent $450.3 million. Had he given the money to the poor, as the subject of the painting instructed another rich man, he could have restored eyesight to nine million people, or enabled 13 million families to grow 50% more food.

  4.  An inside view of the 'AknRobotics' Anadolu Agency/Getty Images

    Two Myths About Automation

    While many people believe that technological progress and job destruction are accelerating dramatically, there is no evidence of either trend. In reality, total factor productivity, the best summary measure of the pace of technical change, has been stagnating since 2005 in the US and across the advanced-country world.

  5. A student shows a combo pictures of three dictators, Austrian born Hitler, Castro and Stalin with Viktor Orban Attila Kisbenedek/Getty Images

    The Hungarian Government’s Failed Campaign of Lies

    The Hungarian government has released the results of its "national consultation" on what it calls the "Soros Plan" to flood the country with Muslim migrants and refugees. But no such plan exists, only a taxpayer-funded propaganda campaign to help a corrupt administration deflect attention from its failure to fulfill Hungarians’ aspirations.

  6. Project Syndicate

    DEBATE: Should the Eurozone Impose Fiscal Union?

    French President Emmanuel Macron wants European leaders to appoint a eurozone finance minister as a way to ensure the single currency's long-term viability. But would it work, and, more fundamentally, is it necessary?

  7. The Year Ahead 2018

    The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

    Order now