The Real Effects of European Monetary Union

Abstract

We explore the impact of European monetary union on the economies of the member countries. Inflation differentials across the euro area have been persistent, such that cumulative real exchange rate movements across the euro area have been quite substantial. The adoption of the euro has indeed contributed to greater economic integration; however, economic linkages with the rest of the world have also been growing strongly, such that the relative importance of trade within the European monetary union has not dramatically increased. In terms of future risks, a severe economic downturn or financial crisis in a member country will be the proving ground for the future political viability of the euro.