Currency Union and Exchange Rate Issues

Currency Union and Exchange Rate Issues

Lessons for the Gulf States

New Horizons in Money and Finance series

Edited by Ronald MacDonald and Abdulrazak Al Faris

This book – written by leading academics and practitioners in the field – brings together cutting edge research on exchange rate regime and monetary union issues. There is a particular focus on the implications for member states of the Gulf Cooperation Council which is itself working towards forming a monetary union for the Gulf States.

Chapter 4: The Euro Experience and Lessons for the GCC Currency Union

Paul De Grauwe

Subjects: economics and finance, financial economics and regulation, international economics, social policy and sociology, migration

Extract

1 Paul De Grauwe INTRODUCTION In 1999 one of the great monetary experiments in history was launched. Eleven member countries of the European Union (EU) created a new common currency, the euro, managed by a new institution, the European Central Bank.2 In so doing, these member countries transferred their monetary sovereignty to this supranational institution. The launch of the euro was a great success. It leads to the questions of how this success was made possible and how the euro experience can be used by other countries to steer towards monetary union. In this chapter I will analyze two ingredients of the successful launch of the euro. The first one has to do with the political and institutional integration that preceded the monetary unification, and the second one will focus on the convergence criteria that were used as a prerequisite to joining the monetary union. While the former will be shown to be essential to a successful monetary unification, the latter will be shown to be dispensable. The destruction of World War II led to a desire for political unification in Europe and a build up of institutions like the European Commission, the European Court of Justice and the European Parliament that all embody some transfer of national sovereignty. I will argue that in order to move into a monetary union the existence of these institutions was necessary. The pre-existence of a supranational institutional structure made it possible to create a new supranational institution, the European Central Bank. I will...

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