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The Economic Consequences of a Large EMU Results of Macroeconomic Model Simulations

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  • Breuss, Fritz

Abstract

Recent economic forecasts increase the probability that firstly, the EMU can start as planned on January 1, 1999 and secondly, that it will start with a large group of countries. The economic implications of the artificially unification of "hard-currency" and "soft-currency" countries are analysed by means of macroeconomic model simulations. The results of a large "non-optimal" EMU are as expected. On the one hand, there are positive income effects for all countries although unevenly distributed over the participants on the other hand, the internal (inflation) and external (value of the Euro vis-à-vis the Dollar) stability are at risk. The "hard-currency" group will be the major winner (in terms of real GDP and employment), whereas the "soft-currency" group has to carry the adjustment costs to a regime of fixed exchange rates (Euro) which results in slower growth, decline in employment and a deterioration of their budgetary position. The necessary convergence of prices and interest rates leads to an increase (decrease) of inflation and interest rates in the "hard-currency" countries ("soft-currency" countries). If the EMU will start with a large group there will be a tendency to devalue the Euro against the Dollar. As a consequence of the uneven economic performance of a large (non-optimal) EMU I would suggest to start the EMU with a core group of "hard-currency" countries. After this mini EMU succeeded the other Member States could join the EMU.

Suggested Citation

  • Breuss, Fritz, 1997. "The Economic Consequences of a Large EMU Results of Macroeconomic Model Simulations," European Integration online Papers (EIoP), European Community Studies Association Austria (ECSA-A), vol. 1, May.
  • Handle: RePEc:erp:eiopxx:p0011
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    Citations

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    Cited by:

    1. Fritz Breuss, 2003. "Österreich, Finnland und Schweden in der EU. Wirtschaftliche Auswirkungen," WIFO Monatsberichte (monthly reports), WIFO, vol. 76(7), pages 529-556, July.
    2. repec:wfo:wstudy:27443 is not listed on IDEAS
    3. Harald Badinger & Fritz Breuss, 2011. "The Quantitative Effects of European Post-war Economic Integration," Chapters,in: International Handbook on the Economics of Integration, Volume III, chapter 14 Edward Elgar Publishing.
    4. repec:wfo:wstudy:45578 is not listed on IDEAS
    5. Egon Smeral, 1999. "Europäische Währungsunion und internationaler Tourismus," WIFO Monatsberichte (monthly reports), WIFO, vol. 72(3), pages 187-195, March.

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    Keywords

    EMU; model simulations; Euro; economics;

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