LUNUPE'S MONETARY UNION the motion hist cominming currency loc- mand caused by temporing change in rency area A highly motels labour force nutions within Barge would inder thatgor market condumont. Domenic mon- cleans thai, to the catcat hut docis an dif- trade among members of the Communky. clary policy can ofbani there fluctuations if ferent shocks in different parts of the our. Those who hold his vice pput that cur. the country in Inising its own curriing but repcy pics. worker will move hom regions not offerwine. The use of a single currency of declining demand to region of stranger flown expanding their sales In when coun- therefore makes product specialisation less ties and from buying from fardia piadix. attractivel a single currency would reduce demand, making differer bool monday the potential gains from tide, policies unnorcity on. bourne fuctwocont In eachany ales Just how similar the shocks, and bow can now than wipe out the normal profits Proponents of mondiary union also from individual tunicions. dalin that a single cementy can In principle mobile the labour force, mobs to juvilyn currency union depends on the potential It is not clear, boomer, whether this help to coax a large financial market by lowering the iransalons calls. This may be pairs from such a unkoas A most toa single mallen In practice. Sunivical sides that ity on made in Europe have failed to find areason for very small countries to to their currency 11 economically julfed if this gains Gower uanactions cass and an ex- currencies in a larger ourmercy, buth h incl- my impad. Moreous, If busincan really count for countries as large as Britain, panded financial market) are large enough France, Germany and Italy, Sophlulcaird to our tigh the lose (the loss of damstic care Glows ochange rare risk, they can hodge In the market forforeign cachangella- hodging can now diminute de omenty Interest rates and the nominal aachange make at policy instruments) notes. Medium- and long-term Mature ar- It is hard to argue that the European kei havebecome much deeper and moreed- Community satisfies the ton inquirements ficdent in recent years. it is tree that Trade goes on of an optimal currency mr. Individual businsimon often complain that such countries suffer substantially different hedoing is "agentin", but I mapen that shock because of diffearnose in the mix of they are confusing de very low cal of avoiding uncenatrey by baring or ailing products they produce, In their depen- dence on imporind cil, and in the lowrica currency funures with the discount or pro- markets to which bey sell mium hat prevail when he: marketopen The greater specialiation of production that should reault from the completion of Funher evidence the carmeny volatility the & apple marica should increme thee dif- does not inhibit Mode is the slurp increase ferences. Labour mobilityamong European in the volume of American import during de if10 when the dollar prand sharply odious will Inevitably remain limited by differences In bigmate and by a culture lee chan i) and containlying Japancic have tol fuand he die flarnotions of the yon that, unlike dint of dic United Stich re- retailve o de dollar and he Furopean gur yards geographic misbility wih suspicion. Expanding the current groupof i) countries rencim have been a serious barrier to their ability to increatn export risks associated with international pretlubo indude the EFTA minions and the cous- A feed change ru may in simiain Eles of Extens Europe would further pac. earn be an obstacle in expanded trade. Con- investments and other financial irmarc- erbale both of dome problcine der a manufacturer in Brigin who cal . tions among the Europees murkyis. Farewell, monetary policy Staying compeddve templates expanding his marketing efforts in France where he will comply with pros The or for mainuining an independent lucen bam the Urired Spin. il dedalar currency pors beand the abilityof a nation Call relative to the hand, the Amerion pro- to hire a countugalical domenic mone- ducen will gain an advantage. Ifthe pound loning an Indepe try policy. Equally Important is that an in. were free to adjust. In might Fall In line with dependent cenergy can thin the ital or the dollar, thus helping to mainula Brichh country All it exports Dat If the exchange rate of the Brit- ment and culpo unas wife and pieces change rate without a commpending change in the level of dometic prion, ith pound is food wis 4-vis the French franc immminicy. In practice, ways and other nc currencies, rich devaluation price adjust only slowly. so output and on- Changes In equilibrium sol cadunce nutt are inevitable, in important puno the would not be pornitin For such a Bidsh play ment suffer. economic environment. For cumple, a manufacturer, developing a market in This could be mitipind with love do- substantial increase in the world price of en- France is lein sitracilet when the steding penible the coury thane Trinde cur- crew calls for a currency appreciation in the frame exchange rain is fund. energy-exporting countries and a decline in Fewer resources may thendow poision renny with a longer economic rea. the real exchange mix of countries thee let- the manufacture of tradable goods and Moreover, when the edung mic is Hovilike more into the production of services and the feverarable cyunslowing effect of low port cherry. Alemalively, the equilibrium domenic interest rates is itinforced by the exchange cast of a country mayshift gradu- poods for the local markri, In short, al- though a world in which all achange rates induced decline of the curithry's value. ally over time because of trends in pro- This tools lau when a country no longer has ducolviny or lassa. were fined might increase trade, haing or- The Japanese ym appitinted in real change rates for a sabri of currendes night it own curicact. normal ly discourage trade. It is worthwhile for a group of Incdopen. wereas in the 1780s and tores ton foot rapid dent countries in adopt a single cuntry productivity growth in japan's cupon sot- A single curency may redare inin-En- when (a] the economic docks that hit the wow. By structural dungn in equilibrium individual countries are similar and (oj la- out exchange nuss an be apound, ripe Wewill free marker should encourage nation In sparialice in producing the product bour is highly mobile among the countries. cially for some of Europe's pooler coumines. If the shocks are similar, de appropriate during the next two decade four which they have a companting advan- A currency union meant, of count, that bye Out such specballunion maks i coun- monetary policy Is generally the same every- where; hide is to be pined by dunging real nominal ending ats cannot adjust to any more vinerable to fluctuations in de. cach noge mies widen the proposed cure achieve a needed change in the sail ex- change rate. The local price level muni,EUROPE'S MONETARYUNION therefore, adjust to bring about the change In the real cichands tone. Thes a los bill in silve in the currencies of America's pher the mal value of a currency can be achieved Although his experience within the American cronemy com one of de high Ines an independent movedar policy A either by a lox all in the nominal exchange ray or by a 10% fall in local wages and coils of having a single currency. nobody ge- prices Dously sitesu that the dollar should be Thor form of adjustment can bring die abandoned for a set of regional currencies. Nothing comparable to America's fiscal real exchange mit to its equilibrium value, Why not? What b so special about the dollar tous a decline in domenic prices is likely to due does not apply equally to the proposed polem bills in Europe, where vinually at town are paid to national and local povera require a period of increased unemploy: European corenge ment it would therefore certainly be better One important difference in that that dol. menis. There is no focal tramfur from the ccel a whole to countries hit experience : to have a decline in his nominal cochange lor has already existed as a currency for udation cyclical decline. Without much a nice. The shift to a single currency in Europe would preclude such remind exchange. more than 100 year. Although there have been period of inflation and deflation, the centralized fiscal systerm. shocks m aggregate demand that are geographically focused, or rate adjusumers and force mal exchange dolier has acquired a reputation as a rda. it's In the real cope librium whee of na rate reduction to be achieved through tively reliable mom of valve and stable wink danal exchange rain, have a bigger lapis lower booed wages and prices of arcount. Not everyone appear to undentand The proposed European currency has on regional income and employment If a single currency is accepted, nations this. Proponents of the shift in a single cur- they immutimes diput incomealy that die more of hie virtues as a more of value and alt of mecunt that only experience can governments might soon have to decide issue of changes in cachange min among re- bring, It would want with no reputation and whether to itcept the greater volaeiry of with an untried European central bank employmentand income dhat comes from glens is meaningless oner a single currency Shifting to it would involve abandoning abandoning an independent monetary pots is accepted be the entire arra. Onme a dagit market and a slagle currency art mub- fished, the argument poes, no one ever looks some currencies that have acquired a repu- bey and flexible exchange root, or warpt in- at the balance of trade amere the compo ration for mobility and soundness, like the stead the loss of national sover paly ever ment region. Who, they ask. even knows p-mark in will as ober currencies with a taxes and spending less solid ban nevertheless positive The politics of Inflation what happens to the bulance of paymenty epination A further reason for a single United I think it is clear that economic analysis don not provide support for a this joane. United Shiet Suirs currency is that the American Sipcal the European currency: in broi note urges Lessons from New England facilitate made and. Ly eliminating the pos. To see why that argument is specious wat sibility of independent monetary policies need only look at what has actualy becca and adjustments of meminal exchange happening meonly In New England. Dur- rain, it is likely to add to the cyclical incra. ing the lies he New England economy bility of incomes and employment. Why benefied bon a mong nadonal demand ments by about $ cents. These national fical topones are put ! led at the poke sol fe then att to many in Europe calling for for the product and services in which it spe- EMUT There are, I think, Ievenl dating po litical senay calism, particularly computers, military equipetent and financial services. The in- Film, some set a single currenty and a creased demand for fire " exports" Com fewer tax dollar to hatingion and me European central bank as a way to meinici New England to the rest of the United Supes tive the ability of national goveminemis in gur. red a rise in their prices and in be rda- suc inflationary manciary polein, In pir- tive level of New England wages and sala- ticular, diess European central bankert ries. During the decade of the lists, mal in- who want now answer in ther finance mir- comes per head grew twice as fast in Isites for the move to asingle currency and a Manuchoppers at in the rest of dic county. European central bank as a But now for demand For computer, for Devaluation would help i . chance to make copcar policy with mud kiss po- linical Interference daline in Awe England wages and in the In check, they argue the prices of New England oporu to the aldiough each joamman could by itell panue a non inflationary moneary Mamadousets has the second higher policy, itis politically cmier unemployment rate imony dit industrial for Europe to do so culinc. times, topped only by Michigan. To shrink thely. Although a Ewo- that unemployment, Mamachuscus wage pean central bank would will have to decline relative to wages clit- will be accountable to some where in the nacion foe chant il political bady like dit Fure Slowlay the growth of waps ha painful penn parliament, distance process, accompanied by a high level of un- from national capitals and employment dedining property values national parkarment is ai- and du widespread failure of New England wmind to redver the pres- banks. New England could deal with the sure of donest damal polldies Oct were able "New Endand dollar" policy They and ohn whe make this argument wouldEUROPE'S MONETARY UNION pan marked for goods and services. Al- though such a fret-trade zone, even if it in wolves no incronies in evernal tariffs. could in chicory love made diverting effects that doorman world welfare, I believe that the weight of the ridenot pointscharly wa nc positive clix from iradiocreation and from decreased postmoment ismervention in do melic markers. Out the creation of a single market for goods and services does not require a clone- tary union, It is pow blew have all the bone fits of face trade without a common cut- rency Indead, the whil to a common currency could actually diminish trade unthin Europe It is alsolikely is reduce eco namic well-bring by raising fucare unem slapper and increasing the exlical vola The case against EMU tilingof activity with in individual counties. And in could cause a higher rate of inflation than thee currant monetary amarginonis. Evens in North America ate Instructite The Unked Sure recently published a free-trade afterient with Canada dis will soon Include Meice. Vid nobody seriously butfran that the Unimed Stairi, Canada and Martin Feldstein-professor of ceonomics at Harvard University, head of Arner- Mexico should form a currency unions. Ica's National Bureau of Economic Research and former chainnan of tie I believe that dis diference does not re Council of Economic Advisers-Is one of America's mon distinguished crone. Meet the ceoronic requirements for effi inists. In this article be argues that the European Community should abandon ciem from trade zones In Europe er Nunk its plans for monetary union America. Insand. in melkers different pollsi- cal poult coy is soade by those who zani GOVERNMENT officials and opinion leaders in several countries have recently in- to max in s political union anong die cur- T leaders throughout Europe are bevin- - and lo ark questions about Emu that might dieated dun dicie national parklaments abio read members of the European Comein ary. They bock a common currency buda as tenet have been raised before the Man- More Importantly, die Danish referest- a public gobod of spannionhood and Irich! conference. Those who question the advisability of adopting a single currency dum rejecting tie Alasjiricht treaty may as an clintive way in whifi decisions on monday and cannally fixzi policy from and a federal struceare for Europe are ark- force a fundamental renegotiation of the nationalespub in Innick. ing Are the econoink bend's great agreement. It will certainly cause govem- enough to ourweich the political disad- menus and member of national parlia The care for linking monsary union to ments to and thenalves whether their con. the creation of the single marlon is based on vantages of the federal gruchine for Europe that would follow the adoption of a single silments really support a move to monetary and political union. Himery teaches time That gout the Ley caution exactly back- and again that major nations cannot be march. Asan economistwho watches the de- forced to accept incaty obligations that they bate from across do ocean, my judgment is regard as contrary to their own interests, As that a single currting Ex Europe would be national poemnews and their publics art cognomic liability The proper question look more carefully at the Implications of therefore is: "Would he political advan- the proposed monetary union, diasatise- aga ofadopting a single currency outweigh tion is likely to increase. he ceoneis diundaanger" One Market. One Monty The question is worth ading despite the claim dot the Massrida agreement made Advocates of a monetary union imply that the adoption of a single currency is noces. monetary union Inevitable. The economic conditions for joining the monciary union many to pericci the single market's free wade are now satisfied by only three countries in goods and services, The Doopain Com- and may never be satisled by all 17. Inaddi. mision has summarized this official view ion, aldouch Brimin alone equickly re. In the tide of in publication "One Market, One Monty"- served the right in the Maastricht treaty not to proceed to a single cuncacy, political I am an coilrusiasuc supporter of the current attempt to achieve A single Euro- Feldsticks regrets3. In the attached article ('The Case against EMU'), there are three underlined sections labeled A, B and C. A) i) Explain using the IS-LM diagram the consequences of a fall in the demand for domestic products on domestic income. ii) Explain and show graphically what the cemtral bank could do to offset this consequence B. Explain using the IS-LM diagram, what an independent New England could have done in the foreign exchange market to offset this contraction in demand for domestic goods. C. Now, since New England is not 'independent', it foregoes the above policy option. Explain and show graphically the economic consequences for New England of the federal government's 'automatic stabilizer'. Explain what 'automatically' happens to demand for domestic (i.e.New England) products