Germany had a credible central bank before the introduction of the euro. What was their macroeconomic incentive to join the currency union?
IMPORTANT: THIS ESSAY IS SPLIT INTO 2 QUESTIONS, BOTH 1500 WORDS.
Q1. Considering the current budget deficit/debt problems faced by some members of the Eurozone, critically evaluate the argument that countries in a monetary union should coordinate their fiscal policies (1500 Words)
Core Information: Carl & Soskice (2015) Textbook – Macroeconomics: Institutions, Instability, and the Financial System, Relevant Chapter: 12- The Eurozone
The textbook is available online through sources such as Academia, just make an account and the whole textbook and referenced chapters are on there.
Below are some discussions from the seminar we did relating to the topic, should give an overview of the taught material and provide the basis for certain arguments, as well as providing the foundation for more academic related arguments through the use of journal articles and reports. (Discussion below is more or less based off chapter 12 in the above textbook)
- What are the microeconomic benefits of a currency union?
There are 4 main microeconomic benefits:
- The elimination of exchange rate risk should lead to higher levels of trade and investment.
- Real resources are saved with the removal of transactions costs that occur during currency conversion.
- Increased competition in the product and labour markets, due to greater ease of price and wage comparisons.
- Increased liquidity in financial markets. This is of particular benefit for small member countries.
- Germany had a credible central bank before the introduction of the euro. What was their macroeconomic incentive to join the currency union? Was this incentive shared by the countries in Southern Europe?
