The Euro: Only for the agile

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Series Details No.1, February 2006
Publication Date 2006
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Summary: Contrary to often-heard concerns, the main question regarding the future of the European single currency is not who is going to leave, but who is going to join. Three of the new EU member states want to join Economic and Monetary Union (EMU) and adopt the euro
within the next year, and others are due to follow within the next decade. The experience of the first seven years demonstrates that membership has its benefits, but that these benefits are not free. Being part of a currency union requires discipline, and the loss of the exchange rate as an instrument for coping with economic shocks can be costly. Within the euro area some members, such as Ireland, are thriving; others, especially among the southern member states, are struggling and face painful adjustments in the future. As the chart below illustrates, economic divergences between existing members have been significant. Ireland and Portugal have experienced marked real exchange rate appreciation, but with very different consequences for export growth. There has been real depreciation in both Germany and France, but only Germany’s exports have flourished.

The author call for more attention to be given to divergences in growth and inflation in the euro area. They ring the alarm bells on the behaviour of some current members and argue that more sophisticated entry criteria need to be applied to possible future members.

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Source Link http://aei.pitt.edu/8334/01/PB200601_Euro.pdf
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Countries / Regions