The economics of EMU

Quarterly Bulletin 1995 Q2
Published on 01 June 1995

The Governor argues that the need for a careful and dispassionate assessment of the economic case for and against Economic and Monetary Union (EMU) should not be overlooked amid the broader political debate about the future of Europe.

The heart of the economic justification for EMU—the irrevocable locking of parities—is that the permanent elimination of exchange rate fluctuations would promote prosperity by deepening the benefits from competition and free trade. EMU would be likely to be useful in helping to convince the business community that intra-European monetary stability would be maintained over the medium and longer term.

The case against, in essence, is that there could be significant continuing intra-EU economic differences causing tensions between Member States which would be difficult to relieve without the possibility of exchange rate adjustment. Real and sustainable economic convergence among the states participating in EMU needs to be achieved to avoid the risk of long-term stagnation in some parts of the Union.

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