European Monetary Union : the new macroeconomics
The monetary union is an open economy with perfect capital mobility. It consists of two identical countries, say Germany and France. A fiscal expansion in Germany causes an appreciation of the euro. This in turn lowers both German and French exports. The net effect is that German income goes up. On the other hand, French income goes down. And what is more, union income does not change. An increase in German government purchases of 100 produces an increase in German income of 74 and a decline in French income of equally 74. What is needed, therefore, is a mix of monetary and fiscal policy.