MONETARY UNION REVISITED
| DOI | http://doi.org/10.1111/j.1467-9485.1977.tb00411.x |
| Author | L. Sirc |
| Published date | 01 February 1977 |
| Date | 01 February 1977 |
Scottish Journal
of
Political Economy,
Vol.
24, No.
1,
February 1977
REVIEW
SECTION
MONETARY UNION REVISITED
L.
SIRC
CAIRNCROSS, SIR ALEC; GIERSCH, HERBERT;
LAMFALUSSY, ALEXANDER
;
PETRILLI,
GIUSEPPE; URI, PIERRE; Monetary and
Fiscal Integration, Chapter
2
of
Economic
Poficy for the European Community
(Lon-
don, Macmillan, 1974), pp. xxt245. $7.50.
CORDEN, W.
M.,
Monetary Zntegration
(Princeton University, International Finance
Section, 1972), pp. 46. €0.45.
JOHNSON,
H.
G.
and SWOBODA, A.
K.
(editors),
The Economics
of
Common
Currencies
(London, Allen
&
Unwin, 1973),
pp. 302.
E5.45.
PRESLEY, JOHN R. and DENNIS, E.
J.,
Currency Areas: Theory and Practice
(London, Macmillan, 1976), pp. 114. €7.95.
TOWER, EDWARD and WILLE~, THOMAS,
The Theory
of
Optimum Currency Areas
and Exchange-Rate Flexibility
(Princeton
University, International Finance Section,
1976). pp. 98.
YEACER, LELAND
B.,
A Reconciliation of
Arguments for and against Large Monetary
Blocs, in BOARMAN, P. M. and TUERCK,
D.
G.
(editors),
World Monetary Disorder
(New York, Praeger, 1976), pp. 269. $13.00.
Summary
The article surveys monetary union
theories in the light of the latest publications
and suggests the following points which are
not commonly accepted:
a
monetary union
is a group of countries between which all
traditional international adjustment mecha-
nisms have been abolished, otherwise the
discussion is essentially about fixed vs.
flexible exchange rates; the purpose of the
union is to foster allocational efficiency and
usefulness of money and also to enforce
efficiency through intra-union competition
both of which require the elimination
of
traditional adjustment; tradeables must
be defined as potentially traded not simply
traded goods; openness is, hence, no
criterion for currency areas, especially as
--even with fixed exchange rates-the ease
of adjustment does not depend
on
openness
but
on
the relationship between the dis-
turbance of equilibrium and the foreign
sector;
a
monetary union is feasible oniy if
wages readily adjust to value productivities
or, if there are regional labour markets, to
the marginal labour productivity in the
marginal firm of the region.
This is an opportune moment for another
look
at monetary union and currency area
theory since the European “snake” has
provided
us
with some-albeit limited-
experience against which
to
test several
approaches to the problem. The latest
publications are most welcome because
they set out the present state of theory
so
that its various aspects can be considered in
the light of current practice. In the process,
some
lacunae
appear indicating that the
theory has not been sufficiently refined as
yet, which prompts the reviewer to suggest
some solutions where there are blanks.
A monetary union must have a purpose
which distinguishes it from other inter-
national exchange rate arrangements-
including pure and simple fixed exchange
rates-which, in turn, influences its defini-
tion; once the essence of monetary union is
established, the question facing us becomes
one of feasibility. Feasibility depends
on
whether disequilibria arise between countries
joined in a monetary union: if they do not,
the union is obviously feasible; if they do,
the union is still feasible provided forces
exist which can restore equilibrium. When
we turn the question to discussing not
whether
a
monetary union is feasible
within a given area, but what would be the
optimum area for
a
monetary union, the
more appropriate concept may
be
that of
a currency area. The problems, however,
are very similar to those pertaining to the
monetary union.
Essence and purpose
of
a monetary
union
A monetary union tends to be defined as
a
group of countries which have either
irrevocably established entirely fixed ex-
change-rates among themselves or have
introduced a common currency and, as a
consequence, centralized monetary and
credit policy and even fiscal policy. Presley
and Dennis (1976) call the first form
a
totally fixed exchange-rate area, the latter
a common currency area. The two forms
87
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