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

See all articles by Fritz Breuss

Fritz Breuss

Vienna University of Economics and Bus. Admin., Europe Institute

Abstract

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

Suggested Citation

Breuss, Fritz, The Economic Consequences of a Large Emu ? Results of Macroeconomic Model Simulations. European Integration online Papers (EIoP), Vol. 1, No. 10, Available at SSRN: https://ssrn.com/abstract=302670 or http://dx.doi.org/10.2139/ssrn.302670

Fritz Breuss (Contact Author)

Vienna University of Economics and Bus. Admin., Europe Institute ( email )

Althanstrasse 39-45
1090 Vienna
Austria

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