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Monetary Integration and Dollarization

No Panacea

Edited by Matías Vernengo

This book deals with the economic consequences of monetary integration, which has long been dominated by the Optimal Currency Area (OCA) paradigm. In this model, money is perceived as having developed from a private sector cost minimization process to facilitate transactions. Not surprisingly, the book argues, the main advantage of monetary integration in the OCA context is the reduction of transaction costs, yet the validity of OCA to analyze processes of monetary integration seems to be limited at best.
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Chapter 1: Reflections on the Experience of the Euro: Lessons for the Americas

Philip Arestis and Malcolm Sawyer


Philip Arestis and Malcolm Sawyer Introduction This chapter aims to review briefly the establishment in the European Union (EU) of the Economic and Monetary Union (EMU) and the single currency (euro) experiment as instituted in January 1999, and ask whether any lessons can be drawn for the Americas. The euro was established for financial transactions with the exchange rates between those national currencies, which will be absorbed by the euro, fixed (to 6 significant figures) on 1 January 1999. The euro replaced the component national currencies for all transactions in the first two months of 2002. The value of the euro has declined through most of the first period of its existence from an initial value vis-a-vis the dollar of $1.18, to parity with the dollar in December 1999, an all-time low in November 2000 of $0.82, before starting something of a climb back and the time of writing (October 2003) is around the initial level vis-a-vis the dollar. We have explored the explanations for the initial decline elsewhere (Arestis et al, 2002, 2003). A brief summary of those papers would be that we find explanations based on ‘bad luck’ (in effect currencies go up and down in value and the first two years of the euro’s existence happened to be a down) and adjustment to prior high value of the euro to be unconvincing. The euro declined well past any purchasing power parity or trade balance benchmark point. The notion that the weakness of the euro is merely the...

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