Will an EMU Ever Fly? A Macroeconomic Study of the Proposed European Monetary Union
Junkin, William P.
The 1993 Maastricht treaty provides that the countries of the European Union will exchange their national currencies for a new, supra-national European Union currency, the euro, by the year 2002. If successful, it would be an economic phenomenon of unusual proportions whose epiphenomena would affect the world's nations many times over. Sadly, in the years since 19931ittle progress has been made. If the treaty was to fail, negative repercussions of a similar magnitude would be produced. The economic details of converting to a common European currency are extensive. This paper takes a macroeconomic approach towards understanding and evaluating the Maastricht treaty's proposal and the associated details. This means that the focus will be on the European Union and its member countries as a whole rather than on specific firms and consumers. Though both the macro and microeconomic approaches are important, I believe that the Maastricht treaty should predominantly be considered from a macroeconomic standpoint. Although European Union political bodies are undoubtedly important, their specific natures and interrelations can be confusing. I have, therefore, purposefully avoided references to the European Council, Parliament, and Commission, focusing instead on the involved core economics. Section two of this paper is a brief introduction. Section three provides a short history of the post-World War II economic associations that have preceded the European Union. The European Economic Community, European Community, Single European Act, Maastricht treaty, as well as the expansion of the European Union are all outlined. At the core, it is obvious that supra-national European associations are continuously growing and tend to focus mainly on economic policies. Section four gives an overview of past European monetary systems. These often have much in common with the Maastricht treaty's edicts. Of note, the section discusses the Bretton Woods system, the "Snake" systems, the old European Monetary System, and the current European Monetary System. Underlining the discussion is the notion that proposals for European currency cooperation have deep roots and indeed seem to be a tenacious thorn in the side of European economic planning. Section five attempts a "crash course" introduction to monetary economic frameworks. The section revolves around the IS-LM macroeconomic paradigm and deals with both the short and the long run. Exchange rates, the Mundeii-Fieming model, and rational expectations are also incorporated. Unfortunately, the constraints of this paper do not allow for a simple or in-depth discussion. Therefore, a fair amount of economic knowledge is a prerequisite for this section. At the very least, one should gain from this section the idea that monetary transaction can be scientifically quantified, albeit, in an often confusing manner. Section six exemplifies the use of several of the frameworks given in section five. Here, a more detailed analysis of the unexpected and detrimental shocks that damaged the European Monetary System in 1992 and 1993 is shown. Important in this section is the idea that many variables and entities can affect monetary policy. Section seven explains some of the benefits that the Maastricht treaty could provide, were it successful. These include: increased market and production efficiency, better investment, trade, and growth opportunities, greater economic stability, lower inflation levels, improved member state relations, more efficient regional policy, and lower market entry costs for small businesses. The section also discusses some alleged benefits (predominantly at the microeconomic level) that prove to be somewhat dubious upon macroeconomic inspection. Important is an understanding of the many tangible benefits that have motivated the Maastricht treaty. Section eight deals with the increased risks and costs that could result if the Maastricht treaty were seen to fruition. Chief among these is the fact that a European Union state will lose the power to autonomously conduct economic policy if the single currency, the euro, is adopted. Other alleged microeconomic costs are then shown to be more ambiguous when viewed macroeconomically. The section attempts to impart the knowledge that significant concerns accompany the Maastricht proposal. Section nine is on optimal currency area theory. Optimal currency area theory attempts to identify those types of regions that would be aided by the adoption of a common currency and those for which it could be detrimental. Several criteria are identified and then the state of the European Union is briefly evaluated. Of note is the fact that the European Union might not be a good optimal currency area due to: a lack of price and labor market flexibility, European Union-level fiscal power, and economic convergence. Also important is the idea that a "core" of central western European countries might qualify as an optimal currency area, whereas other periphery areas might not. Section ten examines the Maastricht treaty in greater depth. Its five main criteria and the controversy that surrounds them, as well as possible bias in the treaty are discussed. The future of the criteria and the three stages until the euro is adopted are also discussed. Important is the idea that the Maastricht treaty's provisions and timeline are not above criticism and are possibly biased towards "core" countries. Section eleven outlines current European Union government action on the monetary front. Here, some political maneuvering is discussed in a general way. The important developments at the recent summits in Dublin and Amsterdam, as well as from the time interceding them are touched upon. The important realization is that states are acting more in opposition than unison. Trickery and errata are also running somewhat rampant in EU states. Section twelve amalgamates many viewpoints and opinions about the Maastricht treaty and its subsequent developments. A partial explanation for the "core's" bias against some periphery countries is given. Also discussed are problems about how exactly to implement the treaty and problems that delaying the Maastricht treaty's implementation could produce. Several of the European Union's primary options as well as political problems are also spelled out. Among the many potential pitfalls, the lack of democratic support for the euro and lack of goodwill at the state level are of note. Section thirteen is a brief discourse on the fate of European Union countries that may not be part of the euro currency system. It is important to note that such countries could experience severe economic damages. Section fourteen provides concluding remarks. Although a persistent inclination throughout history, the Maastricht treaty's movement towards a common European Union-level currency has significant weaknesses. Undeniably, converting to a common currency is an extremely complex task; nonetheless, the treaty and European leadership leave much to be desired. The treaty was drafted atop an ivory tower and then entrusted to irresponsible, uninformed leaders. The proposal could surely work in some form; however, the increasingly naive and Panglossian approach in the European Union endangers this.
viii, 111 p.
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