CESEE and the Impact of China and Russia
Edited by Ewald Nowotny, Peter Mooslechner and Doris Ritzberger-Grünwald
The Greek euro tragedy and the European debt crisis have revived the discussion on the optimal adjustment to asymmetric shocks in a heterogeneous currency area. In the current discussion, the benefits of macroeconomic stability (McKinnon, 1963) and lower transaction costs for factor movements within the European Economic and Monetary Union (EMU) (European Commission, 1990) have been eclipsed by the costs of lost monetary policy independence as an adjustment tool after asymmetric shocks (Mundell, 1961). While some proponents have argued that Greece should exit the EMU to prevent a supranational transfer union, the European Commission (2010) urges the crisis countries to impose austerity in private and public spending to cure the real overvaluation of their abrogated currencies. To prevent further imbalances, France and other international partners have called upon Germany to reduce its surplus in the current account by raising wages and consumption (G20, 2011). In contrast, the German chancellor Merkel highlights the importance of exports for the German growth model. To analyse the consequences of the current policy propositions on the intra-European current account imbalances, we look back to the 1990s when German unification constituted an asymmetric shock to Europe. It will be argued that the legacy of German unification remains an important reason for the current divergence of European current accounts and thereby the current European debt crisis. It will be shown that the adjustment channels of asymmetric shocks in the European (Monetary) Union go far beyond Mundell’s (1961) seminal theory of optimum currency areas, extending to capital markets, fiscal policies and monetary policy.
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