The Quest for Monetary Union: Lessons from Europe

Eduard Hochreiter, Oesterreichische Nationalbank

The last decade has seen vast changes in exchange rate regimes. Many countries and regions have shifted their regimes, generally in the direction of two corners: to floating exchange rates (often combined with inflation targeting) or to currency union/dollarization). Using theoretical insights and the experience of Economic and Monetary Union in Europe (EMU) I argue that empirical evidence on OCA criteria for EMU suggests that benefits outweigh costs although by varying degrees from country to country. While I will not discuss the specifics of EMU I will use the EMU experience to focus on three requirements for long-run sustainability of monetary unions: Fiscal soundness, labor market flexibility and financial market health. My conclusion is that any country wishing to join a monetary union needs to fulfill these conditions and that any set of countries wishing to set up a new monetary union needs a supranational, centralized monetary policy in a system that can be characterized as one of monetary dominance.