Book contents
- Frontmatter
- Contents
- Tables and figures
- Preface
- 1 Introduction: European integration
- 2 From the Bretton Woods system to European Monetary Union
- 3 The Maastricht Treaty and the Stability and Growth Pact
- 4 Structure, political and legal framework of the European Central Bank
- 5 Preconditions for a stable monetary union
- 6 The failure of the two-pillar strategy of the ECB and the revival of Wicksell
- 7 Increasing economic fragility in the EMU before the financial crisis
- 8 Monetary policy during the Great Recession
- 9 Monetary policy and the escalation of the euro crisis until 2012
- 10 The ECB holds the euro together
- 11 The fiscal policy framework in the EMU: no partner for the ECB
- 12 Financial market supervision, banking union and financial market regulation
- 13 The Covid-19 crisis and its effects on the EMU
- 14 Prospects for European monetary policy and EMU
- Notes
- Bibliography
- Index
5 - Preconditions for a stable monetary union
Published online by Cambridge University Press: 20 December 2023
- Frontmatter
- Contents
- Tables and figures
- Preface
- 1 Introduction: European integration
- 2 From the Bretton Woods system to European Monetary Union
- 3 The Maastricht Treaty and the Stability and Growth Pact
- 4 Structure, political and legal framework of the European Central Bank
- 5 Preconditions for a stable monetary union
- 6 The failure of the two-pillar strategy of the ECB and the revival of Wicksell
- 7 Increasing economic fragility in the EMU before the financial crisis
- 8 Monetary policy during the Great Recession
- 9 Monetary policy and the escalation of the euro crisis until 2012
- 10 The ECB holds the euro together
- 11 The fiscal policy framework in the EMU: no partner for the ECB
- 12 Financial market supervision, banking union and financial market regulation
- 13 The Covid-19 crisis and its effects on the EMU
- 14 Prospects for European monetary policy and EMU
- Notes
- Bibliography
- Index
Summary
With the introduction of the euro as the common currency in 1999, the EMU member states took a major step towards integration whose economic and political significance could only be underestimated. From an economic point of view, a domestic currency is an essential component of a nation state, whether that is politically desired or not. Economically members of a currency union become regions within the common currency area. They renounce the possibility of exchange rate adjustments and an independent monetary policy. In a currency area, the common central bank holds the monopoly over issuing money. It dictates the short-term interest rate in the whole currency area, refinances commercial banks and acts as lender of last resort. Monetary policy not only influences the inflation rate in a currency area, but it also deeply influences its economic development including long-term growth and employment. If a country with an independent currency joins a monetary union it changes one of the key fundamentals of its economy.
In our opinion, money and monetary policy are neutral neither in the short nor in the long term. This is in line with Keynes’ paper, “A Monetary Production Economy”:
The theory which I desiderate would deal … with an economy in which money plays a part of its own and affects motives and decisions and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted, either in the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy.
(Keynes 1933: 408)This view corresponds to the fact that the world economy is divided into different currency areas, which in turn are subdivided into different regions. Different currency areas in conjunction with the specific monetary and other macroeconomic policies followed lead to different economic developments. This does not mean that money and monetary policy alone determine economic development. But it means that they have a substantial influence on short-term and long-term developments. The type of monetary union can thus promote growth and employment, but it can also trigger the opposite.
- Type
- Chapter
- Information
- The European Central Bank , pp. 39 - 50Publisher: Agenda PublishingPrint publication year: 2020