EMU: SOME UNANSWERED QUESTIONS
1. Introduction
Most studies that have analysed the possible effects of the European Monetary Unification
process following the Optimum Currency Area approach have concluded that the success of
EMU is related to the degree of flexibility and cyclical symmetry of the European economies.
With no doubt, the main cost of joining a currency area is the loss of monetary policy
instruments at a national level (e.g. the exchange rate) as stabilisation mechanisms against
macroeconomic disturbances that only affect one country of the area or affect them in
different manners. As this kind of macroeconomic disturbances, known as “asymmetric
shocks”, cannot be dealt by a common monetary policy, a high degree of flexibility is needed
to achieve macroeconomic stabilisation. However, there is a wide consensus that European
countries have a lower response capacity in front of adverse asymmetric shocks than other
currency areas, so the role of asymmetric shocks is a key question. In this sense, the most
optimistic view about the risks associated to asymmetric shocks (specific shocks that cannot
be dealt by a common monetary policy) is given by the European Commission (1990) in the
report “One Market, One Money”. In this study, the Commission predicts that asymmetric
shocks will tend to reduce as a result of the greatest co-ordination among European countries,
the increase of intra-industry trade and the similarities of European economic structures. The
alternative view, defended among others by Krugman, suggests that the complete removal of
barriers to trade and the improvement of functioning of the Single Market as a result of the
Monetary Unification will increase the productive specialisation of European regions. As a
result, shocks will tend to be more asymmetric.
The debate about the relevance of asymmetric shocks as a key element to assess the net
benefits of EMU is not closed yet. Some recent studies, such as Frankel and Rose (1997) or
Ramos et al. (1999), indicate that shocks experienced by European countries have tended to
be more symmetric. However, one of the main shortages of this kind of analysis is that the
possible asymmetries derived from differences in the transmission of monetary policy
between the countries taking part in the currency area have not been considered. As Kieler
and Saarenheimo (1998, p. 1) affirm: “Important differences in the impact of the single