The monetary union has proved to be a highly sensitive area of European Integration, as there are several Member states who decided to opt out or have not yet adopted the euro as their currency. Especially during the international banking and financial crisis which later turned into the eurozone crisis, monetary union has been discussed fiercely to the extent that there have been calls to expel Greece from the euro.
As Andrew Moravcsik puts it, the nature of the eurozone was a ticking time bomb (2012). Even Mario Draghi described the incomplete financial integration as the “Achilles’ heel” of the Economic and Monetary Union (2014). During and after the crisis, however, the Member states have implemented a number of institutions and instruments, trying to solve the current crisis and to make the monetary union more sustainable.
The question of this essay is whether the monetary union is likely to fail if there is no further political integration. The essay is structured as follows. In the second chapter I outline the main causes and consequences of the crisis. In the following chapter I demonstrate the theory of Optimal Currency Areas and discuss to what extent the EMU fulfils the criteria. The fourth chapter points out institutional adjustments that have been introduced since the beginning of the crises and suggest further steps. On this basis, chapter five and six discuss the need for political integration and debate measures such as a budgetary union.
Table of Contents
1. Introduction
2. Causes and Consequences of the Crisis
3. Is the Eurozone an Optimum Currency Area?
3.1 I. The Theory of OCA
3.2 II. Is the Eurozone an OCA?
4. Institutional adjustments since 2008
5. Political Integration
6. A European Budgetary union: The only way to save Europe?
7. Conclusion
Objectives and Topics
This essay evaluates the structural stability of the Economic and Monetary Union (EMU) by examining whether political integration and a budgetary union are essential to prevent the collapse of the monetary union in the face of asymmetric economic shocks.
- Analysis of the causes and consequences of the eurozone crisis.
- Evaluation of the Eurozone against the criteria of Optimum Currency Area (OCA) theory.
- Assessment of institutional adjustments implemented since 2008, such as the European Banking Union.
- Discussion on the necessity and challenges of political integration and a common budgetary framework.
Excerpt from the Book
3. Is the Eurozone an Optimum Currency Area?
The theory of optimum currency areas (OCA) has been built up by R.A. Mundell (1961) and supported by the works of Kenen (1969), McKinnon (1963), and others. The basic principles of the theory are that in an OCA economic shocks affect member countries symmetrically and labour and capital can move freely across the area (Eichengreen 1990, p. 1). According to Frankel and Rose, there are four jointly endogenous criteria that determine whether a common currency is appropriate or not:
a) the extent of international trade across member countries and openness of the currency area; b) the symmetry of shocks and business cycles; c) labour and capital mobility; d) risk-sharing through e.g. fiscal transfers (Frankel and Rose 1997, p. 3).
The more distinct these criteria across a region, the more suitable a common currency. The degree of international trade and openness both affect if a currency area constitutes an OCA as they reduce the transaction costs and risks (ibid., p. 4). Trade integration also affects the correlation of business cycles between the member states (ibid., p. 5). They point out the importance of similar business cycles: If they are mostly similar, country-specific shocks can be converted into “internationally co-ordinated business cycles” (ibid., p. 4-5). Thereby, member countries would circumvent the impact of asymmetric shocks even though they renounced independent monetary policy, which is an important stabilising tools (ibid., p. 1).
Summary of Chapters
1. Introduction: Outlines the sensitivity of the monetary union, the impact of the eurozone crisis, and establishes the essay's core question regarding the necessity of further political integration.
2. Causes and Consequences of the Crisis: Examines how the financial crisis exposed systemic vulnerabilities in the Eurozone, including excessive reliance on cheap credit and the lack of adjustment mechanisms in deficit countries.
3. Is the Eurozone an Optimum Currency Area?: Evaluates the Eurozone against theoretical OCA criteria, concluding that significant disparities in economic structure and low labor mobility undermine its stability as a currency area.
4. Institutional adjustments since 2008: Details crisis management instruments introduced post-2008, such as the European Banking Union (SSM and SRM), intended to enforce stricter supervision and reduce sovereign-bank risks.
5. Political Integration: Discusses the theoretical argument that a monetary union without a budgetary union remains fragile and suggests that centralization of debt or fiscal transfers could mitigate asymmetric shocks.
6. A European Budgetary union: The only way to save Europe?: Explores the benefits of a fiscal backstop while acknowledging the counterarguments from scholars who view the ECB's role and countercyclical policy as more critical.
7. Conclusion: Summarizes the findings, arguing that while political integration is essential for long-term sustainability, smaller incremental steps are more realistic in the near term.
Keywords
Eurozone, Monetary Union, Political Integration, Budgetary Union, Optimum Currency Area, OCA, Asymmetric Shocks, Banking Union, Economic Convergence, Financial Crisis, Fiscal Transfers, Eurobonds, European Governance, Stability, Economic Policy
Frequently Asked Questions
What is the central focus of this essay?
The essay explores the structural weaknesses of the European Monetary Union and investigates whether the integration of political and fiscal authority is a prerequisite for the survival of the common currency.
What are the primary thematic fields discussed?
The work covers macroeconomics, European integration theory, fiscal policy, financial regulation, and the political economy of the Eurozone.
What is the main research question?
The essay seeks to answer whether the monetary union is likely to fail in the absence of further political integration.
Which scientific theory provides the basis for the analysis?
The analysis relies heavily on the Theory of Optimum Currency Areas (OCA), originally developed by R.A. Mundell, to assess the economic viability of the Eurozone.
What topics are covered in the main section?
The main sections address the causes of the financial crisis, an empirical evaluation of OCA criteria, the development of banking institutions like the SSM and SRM, and the debate surrounding the implementation of a budgetary union.
Which keywords characterize the work?
Key terms include Eurozone crisis, Optimum Currency Area, political integration, budgetary union, banking union, and macroeconomic stability.
How does the author evaluate the "Banking Union"?
The author views the Banking Union, including the Single Supervisory Mechanism (SSM) and Single Resolution Mechanism (SRM), as an essential step to increase oversight and decouple sovereign debt from private bank risks.
Why does the author consider a budgetary union difficult to achieve?
The author notes that while a budgetary union is theoretically beneficial for managing shocks, it implies significant transfers of sovereignty over taxation and spending, which currently lacks the necessary political and public consensus.
- Quote paper
- José Manuel Geier (Author), 2018, Is it true that Monetary Union without Political Integration is likely to fail?, Munich, GRIN Verlag, https://www.grin.com/document/431201
