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Currency Unions: Some Lessons from the Euro-Zone

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Abstract

Whilst there are many sizeable benefits from currency union, the main disadvantage is often the difficulty of adjusting to an asymmetric shock. Such adjustment is easier when the separate countries (regions) in such a union have flexible labour markets, and when there is a federal fiscal system to ease the adjustment process. The euro-zone has neither. We show that the trends in relative unit labour costs have in several recent cases been worsening relative competitiveness, thereby putting the euro-zone under greater centrifugal pressure. Nevertheless the costs of ‘exit’ are so high that it would only probably occur as a consequence of political mis-calculation.

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Notes

  1. By the same token, the ability to generate seignorage revenue is removed. In the EU, seignorage revenues obtained by the issue of euro notes and coins are, however, redistributed to the member nation states according to a formula relating to relative GDP and population. Under normal circumstances at least, this is not a serious disadvantage, or problem, of currency union.

  2. One such recent asymmetric shock has been the economic emergence of China. This has benefited German exports (machinery and capital goods) and harmed Italian exports (consumer goods, textiles, shoes, etc.).

References

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Acknowledgement

I thank the Central Bank for permission to republish this paper. I am grateful to Jonathan Ng for research assistance and to Iain Begg for many helpful comments. The errors and prejudices remain my own.

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Authors and Affiliations

  1. Financial Markets Group, London School of Economics, London, UK

    Charles A. E. Goodhart

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  1. Charles A. E. Goodhart
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Correspondence to Charles A. E. Goodhart.

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Presidential address presented at the Sixty-Second International Atlantic Economic Conference, October 5–8, 2006, Philadelphia, PA. A previous version of this paper was presented first at the Mercosur Conference, organised by the Central Bank of Uruguay, on August 8–9, 2006 in Montevideo.

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Goodhart, C.A.E. Currency Unions: Some Lessons from the Euro-Zone. Atl Econ J 35, 1–21 (2007). https://doi.org/10.1007/s11293-006-9050-x

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  • DOI: https://doi.org/10.1007/s11293-006-9050-x

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