Is EMU an Endangered Specie? Regional Impacts of Single Monetary Policy

The authors of this paper argue that European Monetary Union (EMU) member countries are likely to respond differently to the single monetary policy of the European Central Bank. Disparities are inevitable, they maintain, given differences in monetary policy transmission due mainly to the so-called credit channel and its different strength in individual countries. The authors develop their argument on two tracks: First, a regional cycles hypothesis is applied to EMU member states and literature is surveyed to illustrate how monetary policy shocks are very likely to bring about different reactions in the development of real economic activity of different EMU member countries. Second, theory and empirical research regarding the so-called credit channel of monetary policy and its strength in the EMU countries is presented. The authors link the two issues and argue that the different regional impacts of single monetary policy in the EMU are caused, to a large extent, by the differing economic structures of EMU member countries, thus supporting the credit-channel explanation. The paper concludes by asserting that the economic structure of the Eurosystem will converge gradually, with the speed of convergence greatly dependent on the degree of unification of EMU jurisdiction. In the meantime, fiscal policy in the EU will be constrained by the Growth and Stability Pact and the EMU will thus have to stay patient not to go the way of dodo bird.