European Monetary Unification: Theory, Practice, and Analysis.

• Author: Wadhawan, Anup
• Position: Review

By Barry Eichengreen. Cambridge, MA: MIT Press, 1997. Pp. v, 349. $45.00.

This book is based on articles published elsewhere by the author on various aspects of the proposed European Monetary Union (EMU). Chapter 1 provides an introduction to the issues and the scheme of the book.

Mundell's (1961) thesis on Optimal Currency Areas (OCA) provides the theoretical framework within which the case for a single currency in Europe is examined. It involves determining whether, in the absence of monetary and exchange rate policy as stabilization tools, labor mobility and symmetry of shocks across member states would be of a sufficient order to make painful wage price changes unnecessary for stabilization. If this were so, the cost involved in the loss of monetary (and possibly fiscal) autonomy in a monetary union would be outweighed by the gains from a single currency.

The OCA issue is taken up in Chapter 3. Higher variability of real exchange rates across European states as compared to U.S. regions and the weaker comovement of stock prices across European centers as compared to two Canadian centers point toward greater asymmetry of shocks across Europe. It is noted that this could just as well be due to quicker adjustment response to more asymmetric shocks in North America than to greater symmetry of shocks. The adjustment response and the exogenous shock process need to be separated to reach a conclusion. This is done in Chapter 4. A structural VAR is estimated with appropriate identifying assumptions. The results support the existence of a European core with supply shocks of smaller magnitude and greater coherence. The distinction is less pronounced with respect to demand shocks. A similar core-periphery structure is supported for the U.S. regions. Shocks for the U.S. core and periphery show greater coherence as compared to the European counterparts. The adjustment response to shocks is quicker in the United States.

Certain direct evidence seems to suggest the greater mobility of labor in the United States. Greater variability of per capita income across countries and within countries in Europe is also pointed out. It is noted that this could imply inherently higher labor mobility or a preponderance of asymmetric shocks acting as a stronger stimulus for migration in the United States. Results from a time-series model that separates the impulse from the response are reported. They show that regional unemployment numbers when perturbed return to...