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EMU: Ready, or Not?

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  • Maurice Obstfeld

    (University of California, Berkeley)

Abstract

In this paper I focus on two specific hazard areas in the transition from Stage Two to Stage Three of European economic and monetary union (EMU), as well as on some key problems of Stage Three that EMU’s monetary and fiscal structures appear ill-prepared to handle. The transitional hazards are of considerable theoretical as well as policy interest: the best way to coordinate monetary stances and lock exchange parities for a smooth switch from eleven national currencies to a single joint currency. A third problem, one that is central for EMU and to any currency union, lies behind the difficulty of the transition: the possibility of nationally asymmetric real shocks. I review that topic in the context of Ireland’s recent experience. The paper goes on to discuss weaknesses in the structure of Stage Three, already much noted, connected with the provision of lender of last resort facilities in the euro zone and the framework for supervising financial institutions. The deficit and debt limits embodied in the excessive deficits procedure of the Maastricht treaty and the subsequent Stability and Growth Pact have been justified by the threat high debts might pose to the stability of the euro zone’s financial markets. I consider the past and prospective fiscal adjustments of the EMU 11, and suggest these might pose future difficulties for macroeconomic policy and growth.

Suggested Citation

  • Maurice Obstfeld, 2000. "EMU: Ready, or Not?," International Trade 0003001, EconWPA.
  • Handle: RePEc:wpa:wuwpit:0003001
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    References listed on IDEAS

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    1. Pu Shen, 1997. "Settlement risk in large-value payments systems," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 45-62.
    2. Obstfeld, Maurice, 1998. "A strategy for launching the Euro," European Economic Review, Elsevier, vol. 42(6), pages 975-1007, June.
    3. Calmfors, Lars, 1998. "Unemployment, Labour-Market Reform and Monetary Union," Seminar Papers 639, Stockholm University, Institute for International Economic Studies.
    4. Kenen,Peter B., 1995. "Economic and Monetary Union in Europe," Cambridge Books, Cambridge University Press, number 9780521558839, May.
    5. Alesina, Alberto & Perotti, Roberto, 1997. "The Welfare State and Competitiveness," American Economic Review, American Economic Association, vol. 87(5), pages 921-939, December.
    6. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
    7. Robert P. Flood & Peter M. Garber, 2000. "Is Launching the Euro Unstable in the Endgame?," NBER Chapters,in: Currency Crises, pages 163-177 National Bureau of Economic Research, Inc.
    8. David Folkerts-Landau & Peter M. Garber, 1995. "Determining the Value of a Financial Unit of Account Based on Composite Currencies: The Case of the Private ECU," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 134-157, March.
    9. Maurice Obstfeld & Giovanni Peri, 1998. "Regional non-adjustment and fiscal policy," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 205-259, April.
    10. D. F. I. Folkerts-Landau & Peter M. Garber, 1994. "Determining the Value of a Financial Unit of Account Basedon Composite Currencies; The Case of the Private Ecu," IMF Working Papers 94/72, International Monetary Fund.
    11. Eichengreen, Barry, 1993. "European Monetary Unification," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1321-1357, September.
    12. Kenen, Peter B, 1998. "Monetary Policy in Stage Three: A Review of the Framework Proposed by the European Monetary Institute," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(1), pages 3-12, January.
    13. Goodhart, Charles & Schoenmaker, Dirk, 1995. "Should the Functions of Monetary Policy and Banking Supervision Be Separated?," Oxford Economic Papers, Oxford University Press, vol. 47(4), pages 539-560, October.
    14. Calmfors, L., 1998. "Unemployment, Labour-Market Reform and Monetary Union," Papers 639, Stockholm - International Economic Studies.
    15. Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
    16. Maurice Obstfeld, 1997. "Europe's Gamble," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 241-317.
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    Cited by:

    1. Jeffrey M. Wrase, 1999. "The euro and the European Central Bank," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-14.
    2. Cheung, Yin-Wong & Friedman, Daniel, 2009. "Speculative attacks: A laboratory study in continuous time," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 1064-1082, October.
    3. Garber, Peter M., 1999. "The target mechanism: Will it propagate or stifle a stage III crisis?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 51(1), pages 195-220, December.
    4. Ahmed AlKholifey & Ali Alreshan, 2010. "GCC monetary union," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Proceedings of the SARB/IFC seminar on "Economic and financial convergence en route to regional economic integration: experience, prospects and statis, volume 32, pages 17-51 Bank for International Settlements.
    5. Lars E. O. Svensson, 1999. "Monetary policy issues for the Eurosystem," Proceedings, Federal Reserve Bank of San Francisco.
    6. W. Jos Jansen, 2000. "On the Cost of Moving from a Quasi Monetary Union to a Full Monetary Union: The Case of the Netherlands," MEB Series (discontinued) 2000-1, Netherlands Central Bank, Monetary and Economic Policy Department.
    7. Ulrich Fritsche & Camille Logeay & Kirsten Lommatzsch & Katja Rietzler & Sabine Stephan & Rudolf Zwiener unter Mitarb. von Cansel Kiziltepe & Christian Proano-Acosta, 2005. "Auswirkungen von länderspezifischen Differenzen in der Lohn-, Preisniveau- und Produktivitätsentwicklung auf Wachstum und Beschäftigung in den Ländern des Euroraums: Endbericht ; Forschungsprojekt im ," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 8, number pbk8.
    8. W. Jos Jansen, 2008. "Inside The Impossible Triangle: Monetary Policy Autonomy In A Credible Target Zone," Contemporary Economic Policy, Western Economic Association International, vol. 26(2), pages 216-228, April.
    9. Alesina, Alberto & Wacziarg, Romain, 1999. "Is Europe going too far?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 51(1), pages 1-42, December.
    10. Calmfors, Lars, 2001. "Wages and wage-bargaining institutions in the EMU – a survey of the issues," Seminar Papers 690, Stockholm University, Institute for International Economic Studies.
    11. Mike Artis, 2002. "The Performance of the European Central Bank," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(1), pages 19-29.
    12. Lambertini, Luisa & Tavares, Jose, 2002. "Exchange Rates and Fiscal Adjustments: Evidence from the OECD and Implications for EMU," FEUNL Working Paper Series wp412, Universidade Nova de Lisboa, Faculdade de Economia.
    13. Ramos, Raul & Clar, Miquel & Surinach, Jordi, 1999. "EMU: some unanswered questions," ERSA conference papers ersa99pa220, European Regional Science Association.
    14. Vitor Gaspar & Anil K. Kashyap, 2006. "Stability First: Reflections Inspired by Otmar Issing's Success as the ECB's Chief Economist," NBER Working Papers 12277, National Bureau of Economic Research, Inc.
    15. Nils Björksten & Miika Syrjänen, 2000. "How Problematic are Internal Euro Area Differences?," EUI-RSCAS Working Papers 14, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    16. repec:ejw:journl:v:7:y:2010:i:1:p:4-52 is not listed on IDEAS
    17. Chow, Hwee Kwan & Kim, Yoonbai, 2003. "A common currency peg in East Asia? Perspectives from Western Europe," Journal of Macroeconomics, Elsevier, vol. 25(3), pages 331-350, September.
    18. Michael D. Bordo & Lars Jonung, 1999. "The Future of EMU: What Does the History of Monetary Unions Tell Us?," NBER Working Papers 7365, National Bureau of Economic Research, Inc.
    19. Lars Calmfors, 2001. "Wages and Wage-Bargaining Institutions in the EMU – A Survey of the Issues," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 28(4), pages 325-351, December.

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    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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