IATE term of the week: Monetary Union

January 8, 2016 2:05 pm

Monetary UnionWith a whole new year ahead, politics and economy experts are discussing again the need to bring Europe’s monetary union to its “logical conclusion” by “creating a true banking union with depositor protection and a European investment fund”.

That’s because EMU (European Monetary Union) is, for now, more theoretical than practical: for example, an unintended consequence of recent years was the formalization of two parallel (euro-denominated) currencies in Greece, which, combined with a punitive taxation, produced “unforeseen incentives for informal transactions in a country that desperately needs to defeat informality”. However, the reality of Greece’s two currencies is only one illustration of the fragmentation of EMU.

The question of “whether the euro area is a monetary union or just a special type of fixed exchange rate regime” is being raised again. To start with, for most experts the introduction of capital controls contradicts the very principle of having a monetary union; but also, the euro area seems to lack a common fiscal capacity, which is “what would allow a league of countries that have given up standard monetary tools to withstand large negative shocks”. Not to say, finally, that the risks the euro area is exposed to are systemic, and yet not covered by any effective insurance mechanism: for instance, “convertibility risks have not been fully eliminated and remain driven by multiple equilibria”.

This institutional inconsistency makes the EU more unstable than necessary, because having a flawed fiscal union is probably worse than no fiscal union at all. Most importantly, only a clear scheme for debt restructuring would eliminate a part of the uncertainty, and leave EU members “ultimately responsible and accountable for their own public debt management” – of course, for better or worse.

Monetary Union IATE

According to IATE’s definition, a “monetary union” is something that implies an “agreement among members (countries or other jurisdictions) to share a common currency, and a single monetary and foreign exchange policy“.

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Written by Eva Barros Campelli
Communication trainee at TermCoord

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