e., rents accruing
due to money printing), to determine the legal tender and the rules
governing the issuance of money.
(C) It is better if a monetary union is preceded by a political one
(consider the examples of the USA, the USSR, the UK, and Germany).
(D) Wage and price flexibility are sine qua non. Their absence is a
threat to the continued existence of any union. Unilateral transfers
from rich areas to poor are a partial and short-lived remedy. Transfers
also call for a clear and consistent fiscal policy regarding taxation
and expenditures. Problems like unemployment and collapses in demand
often plague rigid monetary unions. The works of Mundell and McKinnon
(optimal currency areas) prove it decisively (and separately).
(E) Clear convergence criteria and monetary convergence targets.
The current European Monetary Union is far from heeding the lessons of
its ill fated predecessors. Europe's labour and capital markets, though
recently marginally liberalized, are still more rigid than 150 years
ago. The euro was not preceded by an "ever closer (political or
constitutional) union". It relies too heavily on fiscal redistribution
without the benefit of either a coherent monetary or a consistent
fiscal area-wide policy. The euro is not built to cope either with
asymmetrical economic shocks (affecting only some members, but not
others), or with the vicissitudes of the business cycle.
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