European Monetary Union (3)

Here we are! I left all of you who had the misfortune to read my previous articles with a broad answer about the reasons lying behind the choice of setting a unique monetary area in Europe. As I’ve already had the chance to discuss, this was led mostly by political reasons rather than by economic ones. Using a famous expression often used by an italian journalist: here the question arises as effortless.

Why on earth doing a choice like this, aside from economic reasons?

Well, courage is not lacking in Europeans’ hearts. The strength of the vision of one united European Economy has pushed the majority of European countries to struggle in achieving this target: entering Euroland. And so…

When it’s done, it’s done!

And no matter how much freedom you lost, once the choice has been made, it is better to go for it until the end. Experts through out Europe perfectly knew EU was not and it isn’t yet, a perfect monetary area. The features making an area a suitable place for using a unique currency are:

- High degree of mobility among the regions, of both workers and capital;

- High degree of trade openness among regions; 

- Absent or limited presence of asymmetric shocks.

For what concerns the other two features, Europe cannot be considered as a perfect monetary area. The first problem of mobility has been indeed addressed by the very Maastricht Treaty, where many provisions were considered to foster mobility through regions. Perfect Capital mobility has, at the end of the game, been reached. The integration and harmonysation of capital markets has been strongly helped by IT. Perfect worker mobility is still hard to be achieved. Among the strongest barriers impeding such important step further, there are language and cultural issues. The most striking comparison can be done only with reference to the U.S.A. When people, in U.S.A. are requested to move for work reasons, from West-Coast to East-Coast, the psychological barrier to such a change is far lower than it would be for a European citizen. There would be the issue of learning a completely new language, going to a foreign country (most Europeans still perceive as living in different countries…), facing a very different culture. Those hurdles don’t concern U.S. citizens; they still feel to be moving within the same country, the language is the same, and so it is (more or less), the culture.

Asymmetric shocks concern, to simplify the concept, the actual difference in reaction to an economic shock different areas could experience. Sometimes, in the same country there could exist, at the very same time, depressed and developed regions. Each of them would need a tailored monetary policy that is completely opposite to the one needed by the other region. That’s what happens in Europe. When mediterrinean countries experience negative economic periods, nordic countries could be going very smoothly: what the ECB should do in such an occasion?

This is really a one billion €uro question…