The Park Place Economist


The countdown to form a “united Europe” continues. The first phase of the Economic and Monetary Union will form in early 1998. At this time, the European Council will name those countries that are eligible to form an EMU (due to their compliance with the five economic criteria). This decision of allowing the “in” countries to proceed in an EMU will affect the future decisions of the EMU. Three conditions are crucial to insure the existence of an Economic and Monetary Union in Europe: a single currency, the euro; a single exchange rate; and central bank authority. Several benefits and costs are associated with the formation of an EMU. The size of the EMU will also influence these costs and benefits of an EMU-6 of Germany, France, the Netherlands, Belgium, Luxembourg and Italy, for example, versus an EMU of all 15 member nations. By using the theory of optimal currency areas, one can examine the costs and benefits of an EMU, especially in relation to Eastern European enlargement.