Edited by Erdem Başçı, Sübidey Togan and Jürgen von Hagen
Chapter 7: Preconditions for a Successful Euro Adoption
Paul De Grauwe* 7.1 INTRODUCTION The conditions for successful entry into a monetary union have been hotly debated by economists. In order to clarify the issues, it is useful to make a distinction between long-run and short-run success. Success in the long run can be deﬁned as membership in the monetary union that is sustainable in the long run. This is a situation in which the member countries consider the beneﬁts of the union to outweigh their costs so that there are no incentives to leave the union. In a way it can be said that the equilibrium reached by the member countries is a Nash equilibrium. Success in the short run relates to the success that prospective countries have in mastering the obstacles that have been erected by the present members of the union. For example, the Treaty of Maastricht has speciﬁed a series of conditions that prospective members have to satisfy in order to be allowed into the union. As will be argued later, these conditions have little to do with long-run success. They can be considered as a rite of passage for new members before they enter the monetary club. 7.2 CONDITIONS FOR LONG-RUN SUCCESS The conditions for the long-run success of entry into a monetary union were ﬁrst analysed by Mundell in his celebrated article introducing the concept of optimal currency areas (Mundell, 1961). These are the conditions which determine whether a country will be in a position where the beneﬁts of...
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