In Discussion Paper No. 1222, Research Fellow Willem Buiter reviews the arguments for and against monetary union among the members of the European Union. He finds many of the arguments on both sides to be flawed and draws implications for monetary and fiscal policy design in the transition to monetary union and beyond.

The main conclusions of the paper are as follows. In order to minimize switching costs, the name of the new EU currency should be the Deutschmark. Differential national requirements for seigniorage revenue provide a weak case for retaining national monetary independence. From the point of view of adjustment to asymmetric shocks, nominal exchange rate flexibility is at best a limited blessing and at worst a limited curse. The US currency union works although inter-state labour mobility does not compensate for the absence of state-level exchange rate flexibility. The absence of significant inter-member fiscal redistribution mechanisms in the EU is not an obstacle to monetary union. Convergence or divergence in real economic performance is irrelevant for monetary union. A common currency is the logical implication of unrestricted international mobility of financial capital. The Maastricht criteria are unlikely to hinder monetary union. The author concludes that there are no convincing economic objections left to monetary union in the EU.

Macroeconomic Policy During a Transition to Monetary Union
Willem H Buiter

Discussion Paper No. 1222, August 1995 (IM)