7. Monetary Union ERM in Practice In this system of pegged exchange rates, countries could harmonise their policies to avoid excessive currency misalignments and the need for large devaluations or revaluations. There should be a convergence of their economies however – should be at a similar point on the business cycle and have similar inflation and interest rates.
8.
9.
10.
11.
12.
13. Monetary Union Transition Costs Loss of Policy Independence Structural Issues (one size fits all) Loss of Political Sovereignty Reduce Ex Rate Costs Greater Price Transparency More trade with partner countries Inward investment Macroeconomic Management Greater Economic Integration DISADVANTAGES ADVANTAGES
14. Monetary Union Problems e.g. if Spain has higher rate of inflation than rest of Eurozone – pre EMU it would allow currency to depreciate – after EMU just becomes a depressed region of Europe. Could be argued that Zone needs a fully developed fiscal policy which will divert funds into investment in such regions more than is currently happening. Even if countries continue to harmonise policies, becoming linked in Buziness Cycles etc External shocks (price of oil) might still effect them in different ways.
