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J. Prestmo
International Macroeconomics
29th of October 2015
Outline
Why did European countries decided to form a currency area after the
collapse of Bretton Woods?
Build a single unified market of comparable size to US
Exploit gains from internal trade under exchange rate stability
avoiding speculative attacks / currency crises
A new macroeconomic power backed by a single currency which
possibly competes with dollar as an international unit of account
Key Issues
Gradual ceding of national economic policy powers: loss of
sovereignty
Setting up supranational institutions
Establish rules for national fiscal policies
Economics of EMU
Arguments against...
Krugman View
Endogeneity argument
Joining the EMU removal of trade barriers
Increased trade leads to regional concentration of sectors /
industries because of the exploitation of economies of scale
Increased regional concentration makes the supply-side structures
of economies more diversified asymmetric shocks become more
likely
Empirical Evidence?
Rose (2000; 2002), Rose-Van Wincoop (2001): Monetary Unions
and Trade Flows
Creation of a Currency Area doubles trade flows among members
Subsequent research suggests more modest, but still big impacts
on trade flows
Artis and Zhang (1995), Frankel-Rose (1998): Monetary Unions
and Asymmetric Shocks
Increased integration led to more correlated business cycles / less
asymmetric shocks
So far, European Commission seems right...
Failures of EMU
Unit labor costs and GDP growth rates are sensibly different...
Failures of EMU
Note differences...
Fears if default applied to different countries for different reasons
Ireland, Spain: banks & housing bubbles
Portugal: international borrowing
Belgium, Italy: high public debt
Still, risk premia reflected the size of public deficits...
Increasing debt