Discuss the problems that the EMU will continue to experience in ...

[yoooooman]

Discuss the problems that the EMU will continue to experience in the coming years.
 
  What will be an ideal response?

Question 2

Discuss the trends and implications of the following graph, especially with respect to the official start of the EMU on January 1, 1999.
 
  What will be an ideal response?

[rnehls]

Answer to Question 1

(1 ) Europe is not an optimum currency area; therefore asymmetric economic developments within different countries of the euro zone that call for different interest rates cannot be implements. (2 ) The political part of the unification is much weaker and may limit the political legitimacy of the economic unification. (3 ) On the one hand, labor markets remain highly unionized and subject to high government unemployment taxes and other regulations impeding labor mobility. On the other hand, capital has high incentive to migrate to the EMU countries with the lowest wages. (4 ) Constraints on national fiscal policy are likely to be painful due to the absence of substantial fiscal federalism (fiscal transfer of resources from the rich to the less rich countries within the European Union) within the EU. (5 ) The EU is considering a large-scale expansion of its membership into Eastern Europe and the Mediterranean. This will cause many coordination costs and also the issue of representation of small and big countries.

Answer to Question 2

The extent of intra-EU country trade has fluctuated since the mid-1980s, but the pronounced growth of this trade after the start of the EMU suggests that the adoption of the single euro currency may have encouraged commerce among EU countries, moving them closer to forming an optimum currency area.