The Future of EMU: What Does the History of Monetary Unions Tell Us?

Michael D. Bordo, Lars Jonung

NBER Working Paper No. 7365
Issued in September 1999
NBER Program(s):The Monetary Economics Program, The Program on the Development of the American Economy

The creation of EMU and the ECB has triggered a discussion of the future of EMU. Independent observers have pointed to a number of shortcomings or hazard areas' in the construction of EMU, such as the absence of a central lender of last resort function for EMU, the lack of a central authority supervising the financial systems of EMU, unclear and inconsistent policy guidelines for the ECB, the absence of central co-ordination of fiscal policies within EMU, unduly strict criteria for domestic debt and deficits, as set out in the Maastricht rules, in the face of asymmetric shocks, and Euroland as not an optimal' currency area. Do these 'flaws' represent major threats to the future of EMU? Or will they be successfully resolved by the European policy authorities, leading to a lasting and prosperous EMU? We provide answers to these questions by examining the historical record of monetary unions. We try to extract the key conditions for establishing and for maintaining monetary unions intact. Our main lesson from the history of monetary unions is that political factors will be the central determinants of the future of EMU. The 'economic' shortcomings of EMU will likely be overcome as long as political unity prevails within EMU.

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Document Object Identifier (DOI): 10.3386/w7365

Published: Capie, Forrest and Geoffrey Wood (eds). Monetary Unions. London: MacMillan, 2003.

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