A Public Choice Perspective
Edited by Giuseppe Eusepi and Friedrich Schneider
Chapter 5: EMU as an evolutionary process
1 Pier Carlo Padoan INTRODUCTION Early critics of European Monetary Union (EMU) argued that the project had two major drawbacks, one economic and the other institutional. From the economic point of view, they argued that the euro would not meet the requirements of an optimum currency area and, therefore, that costs would exceed beneﬁts for its members. Second, they argued that EMU would be plagued by an institutional disequilibrium between a supranational, unaccountable central bank and national governments. If these arguments were proved to be valid, EMU would probably fail. This chapter examines the two critiques, and interrelated issues, in an evolutionary perspective. It argues that both points are misplaced because the evolution of the economic structure of EMU as well as its economic policy machinery will eventually bring forward an eﬃcient, viable European economic and institutional model. We discuss the optimality of the monetary union by referring to the concept of ‘endogenous currency areas,’ in which monetary integration spurs transformations in the integrating economies that make the adoption of a single currency more suitable. We provide some evidence with respect to several aspects discussed in the optimum currency area literature, such as cyclical convergence, regional convergence, specialization and labor markets. We consider the evolution of these aspects under diﬀerent monetary regimes in Europe since the introduction of the European Monetary System (EMS) in the late 1970s. We discuss the relationship between the European Central Bank (ECB) and national governments by referring to the concept of...
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