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Discussion Paper No. 1213 is a survey of the literature on monetary
integration, focusing in particular on the Maastricht convergence
requirements. Research Fellow Paul de Grauwe first analyses the
theory of optimum currency areas, which stresses that countries should
have sufficient flexibility in wages, prices and labour to form a
monetary union. This theory suggests that the EU's 15 member states are
probably too many to allow for the smooth functioning of a monetary
union. The author argues that the Maastricht criteria do not provide the
correct selection mechanism to determine the membership of this monetary
club; he proposes instead that each member should determine for itself
whether the benefits of the union outweigh the costs. The second theory considered is the so-called 'new view' on monetary unification, in which the future monetary union must accommodate the desires of Germany, the low inflation country. The author argues that the nominal convergence requirements do not give Germany any guarantees that future members of the union will have the same desire to keep inflation low. Since such guarantees can only be provided by institutional arrangements, more attention should be paid to strengthening the future monetary institutions of the union. The budgetary convergence requirements have a sound theoretical basis, but risk a prolonged division of the EU, which would encourage divergence rather than convergence between members and non-members of the monetary union. Hence, the author suggests a procedure for removal from the Board of Directors of the European Central Bank should a country fail to maintain price stability. If a country fails to satisfy the budgetary norms, only voting powers should be denied in order to prevent excessively expansionary monetary policies. The Economics of Convergence Towards Monetary Union in Europe Paul de Grauwe Discussion Paper No. 1213, July 1995 (IM) |
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