European Monetary Unification: A Few Lessons for East Asia
| Published date | 01 February 2016 |
| Author | Paul De Grauwe |
| Date | 01 February 2016 |
| DOI | http://doi.org/10.1111/sjpe.12108 |
EUROPEAN MONETARY UNIFICATION:
A FEW LESSONS FOR EAST ASIA
Paul De Grauwe*
ABSTRACT
In this paper, I analyze the experience of European monetary and financial inte-
gration to shed some light on the question of the desirability and feasibility of
monetary unification in East Asia. The experience of Europe shows that trying
to fix the exchange rates when capital is freely moving is unsustainable and leads
to frequent speculative crises. This leads to only two options: Either a monetary
union or floating exchange rates. Monetary union requires very intrusive political
unification. Given the complete absence of political unification in Asia, the only
possible conclusion is that Asia will have to live with increasing exchange rate
volatility.
II
NTRODUCTION
In this paper, I study the history, both old and new, of the attempts at mone-
tary unification in Europe. I do this to shed some light on the question of the
desirability and feasibility of monetary unification in East Asia. I will stress
that even if the standard economic conditions for a successful monetary union
are satisfied, much stronger conditions exist to make a monetary union suc-
cessful. These come from the political sphere.
In section II, I give a brief history of the monetary unification in Europe.
In sections III and IV, I ask the question of whether the economic conditions
for a successful monetary union are satisfied in East Asia. This analysis is
based on the theory of optimal currency areas. In the subsequent sections, I
study the political conditions for making a monetary union successful and I
conclude that these are certainly not satisfied in East Asia.
II A BRIEF HISTORY OF MONETARY UNIFICATION IN EUROPE
Monetary cooperation started in Europe with the European Payments Union
(EPU) in 1950. This was an arrangement among the 18 members of the Orga-
nization for European Economic Cooperation (OEEC), the precursor of the
OECD. The dollar shortage and the absence of convertibility within the
OEEC had created the problem that each country would have to balance its
*London School of Economics
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12108, Vol. 63, No. 1, February 2016
©2016 Scottish Economic Society.
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