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Introduce a Single Currency

According to a literature that originated from Tuft that has labelled what the ERM tried to accomplish as optimum currency area, it claims that what is valued is what will be gained in credibility and efficiency, while easily trading away monetary sovereignty and the ability of coming up with a mechanism to stabilize ones economy, using fiscal policy (Mundel 1961). What that leads to is any heterogeneity among nations will be gone putting under every single nation under one umbrella.

When that is the case the expectation is there will be a high level of trade openings, simply because there is a savings to be made once an optimum currency area is created and the more trading takes place the savings would also be higher. Especially, when that is the case risks related to a floating currency and a fluctuating currency would disappear. It is also possible to assume that instigating factor mobility such as labour is possible, but the reality is the other way round where the impact of whatever is taking place will be marginal.

Especially, in the case of Europe, because of the language barrier the mobility of labour is low, which means it would affect the effectiveness of the new introduction to some degree, although it will not hinder the other advantages. Another area that could cause problem is if there are dissimilarities that persist after the introduction of optimum currency area, simply because when that is the case asymmetric Mundell, Robert, 1961, “A Theory of Optimum Currency Areas”, American Economic Review, November, 509-517. shocks could force various nations to take different measures. It is not possible to avoid

that completely although if there are similarities in economic structure, policy regimes, institutions etc. it is possible to mitigate the asymmetric consequences that could also be the outcome of symmetric shocks. A few examples to cite could be the labour market where a union might have a barraging power that will result in raising wages that will force prices to go up. Since that would not be across the board, the members affected by this problem have no tool on their hand to introduce correction, simply because both interest rates and the exchange rates are the responsibility of a central bank for the whole region.

It is also possible the integration of trade could introduce intra-industry trade due to economies of scale and could lead to regional industrial concentration. Accordingly, the reason for that is the removal of the trade barriers in a single market. If there is a problem, it is that if nations want to concentrate on certain productions that will avail them economies of scale. When that is the case, what could happen is industry-specific shocks could end up being regional shocks.

What would avoid that is diversification has to be part of any integration in order to minimize or avoid asymmetric shocks. Supra-national fiscal distribution would also become part of any monetary integration of nations whereby there might be a need of distributing economic resources from well to do countries to those that could be lagging behind. If it is in a form of investment and economic activity, it would more sustainable, but if there is a need of using taxation to ameliorate such inadequacies, it is always possible that taxpayers might not like helping other nationals.