A Long Term Perspective on the Euro

34 Pages Posted: 15 Feb 2008 Last revised: 26 Mar 2008

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Harold James

Princeton University - Department of History; National Bureau of Economic Research (NBER)

Date Written: February 2008

Abstract

This study grounds the establishment of EMU and the euro in the context of the history of international monetary cooperation and of monetary unions, above all in the U.S., Germany and Italy. The purpose of national monetary unions was to reduce transactions costs of multiple currencies and thereby facilitate commerce; to reduce exchange rate volatility; and to prevent wasteful competition for seigniorage. By contrast, supranational unions, such as the Latin Monetary Union or the Scandinavian Currency Union were conducted in the broader setting of an international monetary order, the gold standard. There are closer parallels between EMU and national monetary unions. Historical monetary unions also were associated with fiscal unions (fiscal federalism). Both fiscal and monetary unions were an important part of the process of political unification. In the past, central banks, and the currencies they managed, have been discredited or put under severe strain as a result of: severe or endemic fiscal problems creating pressures for the monetization of public debt; low economic growth may produce demands for central banks to pursue more expansionary policies; regional strains producing a demand for different monetary policies to adjust to particular regional pressures; severe crises of the financial system; and tensions between the international and the domestic role of a leading currency. In particular, there is the possibility for the EMU that low rates of growth will produce direct challenges to the management of the currency, and a demand for a more politically controlled and for a more expansive monetary policy. Such demands might arise in some parts or regions or countries of the euro area, but not in others and would lead to a politically highly difficult discussion of monetary governance.

Suggested Citation

Bordo, Michael D. and James, Harold, A Long Term Perspective on the Euro (February 2008). NBER Working Paper No. w13815. Available at SSRN: https://ssrn.com/abstract=1093653

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harold James

Princeton University - Department of History ( email )

Princeton, NJ 08544
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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