One Money for Europe? Lessons from the US Currency Union

Abstract

Currency union Barry Eichengreen The creation of a monetary union in Europe is often justified by the desire to reap the full benefits of economic integration. The complete removal of capital controls raises a large number of issues. The case for free capital mobility is strong, but not overwhelming. It hinges on issues of technology, transport costs, market structure and labour mobility, and in the end is an empirical matter, for which US experience may provide useful information. Policy-making institutions differ in important respects, however. The US tradition of fiscal federalism, for example, has no EC-wide counterpart. Yet its functions seem a desirable feature of a monetary union. In particular it is shown to play an important role in absorbing regional disturbances, mostly via the tax system. US experience also suggests that a currency union creates pressure for fiscal policy harmonization, affecting both taxes and spending. Although a currency union fundamentally alters the balance-of-payments adjustment process, the potential problem of depressed regions remains a serious one. Given the increased tightness of the external constraint, the limited extent of labour mobility, and other features of European labour markets, solutions based on US experience include extensive swap facilities and a European version of fiscal federalism.