The Economic Consequences of a Large Emu ? Results of Macroeconomic Model Simulations
European Integration online Papers (EIoP), Vol. 1, No. 10
19 Pages Posted: 8 Mar 2002
Recent economic forecasts increase the probability that firstly, the EMU can start as planned on January 1, 1999 and secondly, that it will start with a large group of countries. The economic implications of the artificially unification of "hard-currency" and "soft-currency" countries are analysed by means of macroeconomic model simulations. The results of a large "non-optimal" EMU are as expected. On the one hand, there are positive income effects for all countries - although unevenly distributed over the participants - on the other hand, the internal (inflation) and external (value of the Euro vis-a-vis the Dollar) stability are at risk. The "hard-currency" group will be the major winner (in terms of real GDP and employment), whereas the "soft-currency" group has to carry the adjustment costs to a regime of fixed exchange rates (Euro) which results in slower growth, decline in employment and a deterioration of their budgetary position. The necessary convergence of prices and interest rates leads to an increase (decrease) of inflation and interest rates in the "hard-currency" countries ("soft-currency" countries). If the EMU will start with a large group there will be a tendency to devalue the Euro against the Dollar. As a consequence of the uneven economic performance of a large (non-optimal) EMU I would suggest to start the EMU with a core group of "hard-currency" countries. After this mini EMU succeeded the other Member States could join the EMU.
Keywords: European integration, EMU, model simulations, Euro, economics
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