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Currency Unions: Some Lessons from the Euro-Zone

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  • Charles Goodhart

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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. Copyright International Atlantic Economic Society 2007

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    File URL: http://hdl.handle.net/10.1007/s11293-006-9050-x
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    Bibliographic Info

    Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

    Volume (Year): 35 (2007)
    Issue (Month): 1 (March)
    Pages: 1-21

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    Handle: RePEc:kap:atlecj:v:35:y:2007:i:1:p:1-21

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    Keywords: currency union; asymmetric shock; euro-zone; relative unit labour costs; exit costs; F33; F36;

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    1. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
    2. Charles Goodhart, 2006. "Replacing the Stability and Growth Pact?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 34(3), pages 243-259, September.
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