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UNU-WIDER EMU and its Impact on Europe and the Developing Countires

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EMU and its impact on Europe and the Developing Countires

Project name/title
EMU and its Impact on Europe and the Developing Countires
Year:
1998
Theme:
Globalization and Trade
Abstract:
The single European currency, the euro, due to be launched at the beginning of 1999, implies deep changes in the pattern of economic integration in Europe, as well as in the world financial system. These changes will have important consequences on developing countries as well.In Europe, the move to a single currency will pose new policy challenges both at the national level and at the European level. Countries with an economic structure different from the European core structure face a risk of asymmetric shocks. To countervail these, they need efficient fiscal stabilizers and highly flexible labour markets. For Europe as a whole, new modes of policy cooperation will be required to ensure the credibility of common monetary policies and a proper, stability-enhancing monetary-fiscal policy mix on a European scale. The policy challenges are particularly serious during the opening phase of the monetary union. The European Central Bank must enhance its credibility, at the same time that, for many of the countries participating in the single currency, the room for manoeuvre in fiscal policy is likely to be restricted by the sanction limits imposed in the stability and growth pact. In the short term, this approach is causing a series of competitive deflations that may lead to an aggravation of the employment problem and slow growth syndrome of many European countries. The long-term effects are less clear.The impact of the single currency on regional production structures and on the pattern of capital markets in Europe requires further study. There are contrasting hypotheses in regard to the impact on production structures, both the convergence and the divergence of regional structures having their supporters, while the implications of the monetary union for the structure of financial markets and the status of different types of credit clients, sovereign borrowers included, are a much neglected research field. The euro also implies deep changes in the international monetary system. The world will move to a three-pole currency system, with the dollar, yen and euro as the key currencies. As the currency blocs will tend to be inward-looking in terms of trading patterns, large exchange-rate oscillations may take place as a result of divergent economic trends or policy moves. Such exchange rate instability, should it occur, would be particularly harmful to countries which trade extensively with countries in all three currency blocs. In due course, the euro may become a vehicle currency in international trade and finance. Taken together, the EMU countries will form a leading trade bloc, and the euro will occupy an important position as invoice and pricing currency in international trade. The euro may also challenge the dollar as the key currency in international lending operations. While the developing countries might be affected over the short term by the slow growth and the rise in unemployment (and the possible diversion of resources from foreign to domestic aid) associated with the over-deflationary approach generated by the Maastricht criteria, the medium term effects are likely to be more favourable. Changes in both the global exchange rate environment and the international vehicle currencies are important for the developing countries. As their export revenues are often highly sensitive to exchange rate fluctuations, these countries need exchange rate stability and therefore the economic policy coordination required for this stability. Many developing countries have traditionally pegged their exchange rates to the dollar. This may have to be reconsidered if the euro becomes an important vehicle currency.
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