Changing Institutions in the European Union
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Changing Institutions in the European Union

A Public Choice Perspective

Edited by Giuseppe Eusepi and Friedrich Schneider

This book makes a valuable, analytical contribution to recent debates on the ongoing institutional changes occurring within the European Union. It provides a comprehensive and diverse insight into a variety of areas, including in-depth studies of fiscal, monetary and voting issues, to help elucidate the current period of transitional change.
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Chapter 5: EMU as an evolutionary process

Peter Bernholz


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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