Economics of the EU - Class 10

Amongst the following benefits of joining the EMU, which one aim at boosting trade within the union?

The costs of joining a common currency area...

The costs of joining a common currency area...

Mundell was the first economist to consider the case of asymmetric shocks in currency area in 1961.

A country suffering a negative asymmetric shock inside a currency area cannot use its exchange rate or its monetary policy to accommodate the demand shock and the common monetary policy cannot accommodate this kind of shocks. Hence adjustment has to go through:

After a negative demand shock, price and wage should decrease so as to make the country more competitive and thus stimulate demand.

What is the main risk in case investors fear default in one country of the EMU?

By entering a monetary union, member countries become more vulnerable to movements of distrust by investors.

A schematic assessment of the current EMU as an OCA, considering additional criteria presented by economists other than Mundell: The EMU is quite good in terms of [blank_start]economic openness/trade integration[blank_end] (McKinnon 1963) and [blank_start]diversification production/consumption[blank_end] (Kenen 1969). Although it is a condition to enter the EMU, it is lacking [blank_start]similarities of inflation rates[blank_end] (Fleming 1971) and requires further [blank_start]financial market integration[blank_end] (Ingram 1962) which did not work as expected. Finally it is hindered by a very low level of [blank_start]political integration[blank_end] (Mintz 1970) and [blank_start]compatibility in preferences[blank_end] (Tower and Willet 1976) as well as a [blank_start]non-existent fiscal integration[blank_end] (Kenen 1969).