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Introduction: European enlargement generally refers to the inclusion of new states into the European Union's Treaty area. This article considers instead the enlargement of Economic and Monetary Union into Africa. We know that no part of Africa is in the EU, though Morocco has sought to join, and the island of Mayotte belongs to an EU member state (France) and uses the euro. But the EU's single currency area is not identical with its monetary area. This article is about EMU beyond the EU itself, and in particular about the monetary shadow European colonial history has cast over western and central Africa. Here as well as in the Comoros islands three local currencies were long in the monetary area of France, and are now but local expressions of the euro. That was why in the late 1990s the impending introduction of the single European currency aroused considerable interest and some anxiety in those African countries that faced possible inclusion in the EU's monetary union. The question was whether the EC institutions should take over responsibly for monetary policy in the former French African overseas territories, although they are not in the EU now, and were never part of the EEC before independence. Alternatively, experts in Europe and in Africa considered whether France should maintain its monetary guarantee, and if so, whether the CFA franc should be decoupled from the future European currency. Finally, the CFA franc zones could simply disappear. Today currencies in the fourteen Francophone states plus those of two of Portugal's former African overseas countries are simply local variants of the euro. This paper briefly puts this strange situation in its historical context, considering what has changed and what has not with the changeover from the franc CFA pegged to the French franc, to a franc CFA pegged to the euro. I shall then ask, together with mainly African economists, political analysts and politicians, whether Africa's proxy euro zone should expand to take in perhaps the entire sub Saharan continent, which has a privileged trade and aid relationship with the EU. Alternatively, do Africans and Europeans see a European monetary zone in Africa as an opportunity or as an anachronistic burden? Do Africans within the zone want to remain tied to the EU to a degree that exists in no other sovereign states outside Europe? Two of the three CFA franc cum euro monetary zones have expanded both in nature and in geographical extent, having become economic unions and taken in two ex Portuguese dependencies. Do these now wish to form even larger units and turn themselves into regional common markets, with a common currency that in reality is not a currency at all, but only one or several local variants of the euro? How do other African states regard such ambitions? The answers to these questions require first a brief historical comment.

The purpose of this article is to provide a political economy rationale that helps explain why some non-central European economies, featuring highly idiosyncratic disturbances and apparently low inflation bias inefficiencies, seem so eager to enter the European Monetary Union (EMU). The main message from the paper is that because these economies normally display a high degree of domestic political uncertainty, the "economic costs" arising from the decision to surrender monetary policy may in fact be less severe than the "political costs" of opting out of EMU and then possibly facing undesired inflation upsurges in the future. ; O objetivo deste artigo é sugerir um argumento de economia política que ajude a explicar porque alguns países periféricos da Europa, que apresentam choques econômicos altamente idiossincráticos, e que conseguiram controlar o problema do viés inflacionário recentemente, apresentam elevado desejo de ingressar na União Monetária Européia. A principal mensagem do artigo é que, devido ao elevado grau de incerteza e polaridade política presentes nestas economias, os "custos econômicos" de se delegar hoje a política monetária a um agente externo, podem se mostrar menores que os "custos políticos" de não adesão caso um governo com preferências inflacionárias mais amenas venha a vencer as eleições futuras.

In the decade since its creation in 1999, the European Economic and Monetary Union (EMU) has experienced surprisingly large and persistent inflation differentials across member states causing substantial shifts in relative price levels. At the same time, member countries exhibited distinct non-synchronized output fluctuations, giving rise to a pattern of 'rotating slumps' (a term coined by Olivier Blanchard). This paper presents a stylized theoretical model of a monetary union which demonstrates how inflation differentials and relative output movements interact dynamically. A number of implications are derived from the model. In particular, national fiscal policies are shown to have an important role in containing internal macroeconomic disparities in a monetary union. An optimal fiscal policy rule is derived from the model for that purpose.

This paper discusses possible links between monetary arrangements in particular monetary union and economic growth. It is stressed that growth depends ultimately on how the real economy works: there is no monetary magic that can conjure up growth. But monetary policy can contribute to conditions for sustainable growth by securing and maintaining price stability; monetary union might extend this. It might also deepen the single market. The elimination of nominal exchange rate movement among members of the union removes some sources of shock but also some ways of adjusting to shocks. This underlines the importance of other adjustment mechanism especially supply-side flexibility, which is crucial for growth in any event.

In the aftermath of the global financial crisis, sovereign default risk and the zero lower bound have limited the ability of policy-makers in the European monetary union to achieve their stabilization objective. This paper investigates the interaction between sovereign default risk and the conduct of monetary policy, when borrowers can act strategically and they share with their lenders a single currency in a monetary union. We address this question in an endogenous sovereign default model of heterogeneous countries in a monetary union, where the monetary authority may be constrained by the zero lower bound. We uncover three main results. First, in normal times, debtors have a stronger incentive to default to induce more expansionary monetary policy. Second, the zero lower bound, or constraints on monetary policy may act as a disciplining device to enforce repayment of sovereign debt. Third, sovereign default risk induces countries with a preference for tight monetary policy to accept a laxer policy stance. These results help to shed light on the recent European experience of high default risk, expansionary monetary policy and low nominal interest rates. ; The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.

Diese Dissertation beschäftigt sich mit drei Problemen von Staatsschulden, die während der jüngsten Finanz- und Wirtschaftskrise in der Eurozone aufgetreten sind. Sie untersucht zunächst die Frage ob die Zinssätze auf Staatsanleihen in einer Währungsunion von ökonomischen Fundamentaldaten oder von Marktstimmungen bestimmt werden. Zu diesem Zweck werden Techniken von Ereignisstudien verwendet um die Reaktion von langfristigen Zinssätzen auf unterschiedliche Kategorien von Neuigkeiten über Änderungen in Fundamentaldaten zu analysieren. Sie kommt zu dem Schluss, dass man zwar eine signifikante Reaktion auf manche solcher Neuigkeiten feststellen kann, dass es aber keine feste Beziehung zwischen Änderungen in den Fundamentaldaten und Zinsen gibt, die über alle Länder hinweg stabil ist. Der zweite Teil der Dissertation behandelt die Frage wie die Nachhaltigkeit von Staatsfinanzen empirisch beurteilt werden kann. Darin wird ein empirisches Modell von Staatsschulden entwickelt und geschätzt, das in der Lage ist die Wahrscheinlichkeitsverteilung der Schulden-BIP-Quote zu jedem zukünftigen Zeitpunkt darzustellen. Für den Anwendungsfall Österreich deuten Vorhersagen auf Basis dieses Modells darauf hin, dass der Anstieg in der Schulden-BIP-Quote, der während der Eurokrise zu beobachten war, eher als transitorisches Randereignis und nicht als Hinweis auf ein langfristiges Nachhaltigkeitsproblem gesehen werden sollte. Die dritte Frage betrifft die Übertragung des Risikos eines Staatsschuldenausfalls auf den Rest der Volkswirtschaft. Um diese Frage zu untersuchen stellt die Dissertation ein Konjunkturmodell vor, in dem der Finanzsektor Staatsanleihen als Sicherheiten hält. In diesem Modell kann ein Anstieg der Ausfallwahrscheinlichkeit sowohl zu einer Kreditklemme als auch zu einer fallenden Güterproduktion führen. Wenn man das Modell zu Daten der Eurozone kalibriert, kann es einige wichtige stilisierte Fakten der Eurokrise erklären. ; This dissertation deals with three issues of public debt that emerged during the recent financial and economic crisis in the Eurozone. It first investigates the question whether the interest rates on government bonds in a monetary union are determined by economic fundamentals or market sentiments. For this purpose it uses event study techniques to analyze the reaction of long-term government interest rates to different categories of news about changes in fundamentals. It concludes that there is a significant reaction to some such events, but that there is no tight empirical link between changes in fundamentals and interest rates that is stable across countries. The second part of the dissertation addresses the question how the sustainability of government finances can be assessed empirically. It develops and estimates an empirical model of government debt that is able to characterize the probability distribution of the debt-GDP ratio at any future date. For the case of Austria, debt projections based on this model indicate that the increase in the debtGDP ratio that occurred in the aftermath of the Eurozone crisis should be seen as a transitory tail event rather than a sign of long-run unsustainability. The third issue concerns the transmission of government default risk to the rest of economy. The dissertation studies this issue by building a business cycle model with a financial sector that holds government bonds as collateral. In this model, an increase in the probability of default can lead both to a credit crunch and a decline in output. It shows that, when calibrated to Eurozone data, the model is able to explain some key stylized facts of the Eurozone crisis. ; Maximilian Gödl ; Zusammenfassung in deutscher und in englischer Sprache ; Karl-Franzens-Universität Graz, Dissertation, 2017 ; OeBB ; (VLID)2004028

Results from cointegration and error-correction models for testing the effects of currency substitution in Greece, Portugal and Spain, in light of their upcoming participation in the European Monetary Union, revealed no significant short- or long-run currency substitution behavior in any country, suggesting that joining the union now would offer them no real benefits, unless significant economic convergence is achieved.

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.

We derive the optimal fiscal transfer scheme for countries in a monetary union to off-set the welfare losses resulting from asymmetric shocks and nominal rigidities. Optimal transfers involve a trade-off between reducing national output gaps and the provision of consumption insurance across countries, where the weight of the former increases relative to the latter as consumption home bias rises. The welfare gains from optimal transfers increase in both home bias and export substitutability. When these parameters are calibrated to the data for specific euro area countries, the welfare gains from optimal transfers are as high as 3.6% of permanent consumption. ; The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.

This paper takes a first step in analysing how a monetary union performs in the presence of labour market asymmetries. Differences in wage flexibility, market power and country sizes are allowed for in a setting with both country-specific and aggregate shocks. The implications of asymmetries for both the overall performance of the monetary union and the country-specific situation are analysed. It is shown that asymmetries are not only critical for country-specific performance but also for the overall performance of the monetary union. A striking finding is that aggregate output volatility is not strictly increasing in nominal rigidities but hump-shaped. Moreover, a disproportionate share of the consequences of wage inflexibility may fall on small countries. In the case of country-specific shocks, a country unambiguously benefits in terms of macroeconomic stability by becoming more flexible, while this is not necessarily the case for aggregate shocks. There may thus be a tension between the degree of flexibility considered optimal at the country level and at the aggregate level within the monetary union.

This paper takes a first step in analysing how a monetary union performs in the presence of labour market asymmetries. Differences in wage flexibility, market power and country sizes are allowed for in a setting with both country-specific and aggregate shocks. The implications of asymmetries for both the overall performance of the monetary union and the country-specific situation are analysed. It is shown that asymmetries can have important effects, and that there are substantial spill-over effects. Among other things, it is found that aggregate output volatility is not strictly increasing in nominal rigidity but hump-shaped. A disproportionate share of the consequences of wage inflexibility may fall on small countries. In the case of country-specific shocks a country unambiguously benefits in terms of macroeconomic stability by becoming more flexible, but in general an inflexible country does not necessarily achieve more output stability by becoming more flexible. As this may be desirable for the monetary union as a whole, there is a risk of a ?reform deficit? in an asymmetric monetary union.

This paper investigates the dynamic effects of monetary and fiscal policy in a monetary union, which is characterized by asymmetric interest rate transmission. This asymmetry gives rise to intertemporal reversals in the relative effectiveness of policy on member country outputs. The direction and the number of these reversals depend on whether policies are unanticipated or anticipated. We also study the coordination between monetary and fiscal policy in a monetary union. Monetary policy may completely stabilize European output after unanticipated fiscal policy shocks. With anticipated fiscal policy shocks, complete stabilization throughout the overall adjustment process requires monetary policy to be time-inconsistent.

We use a two-country model with a central bank maximizing union-wide welfare and two fiscal authorities minimizing comparable, but slightly different country-wide losses. We analyze the rivalry between the three authorities in seven static games. Comparing a homogeneous with a heterogeneous monetary union, we find welfare losses to be significantly larger in the heterogeneous union. The best-performing scenarios are cooperation between all authorities and monetary leadership. Cooperation between the fiscal authorities is harmful to both the whole union's and the country-specific welfare.

We use a two-country model with a central bank maximizing union-wide welfare and two fiscal authorities minimizing comparable, but slightly different country-wide losses. We analyze the rivalry between the three authorities in seven static games. Comparing a homogeneous with a heterogeneous monetary union, we find welfare losses to be significantly larger in the heterogeneous union. The best-performing scenarios are cooperation between all authorities and monetary leadership. Cooperation between the fiscal authorities is harmful to both the whole union's and the country-specific welfare.

This contribution to the panel on the future to EMU discusses the tensions that arise from the fact that banks are, on the one hand, an essential element of the monetary transmission mechanism and, on the other hand, an integral part of local, regional or national polities. Banking union can eliminate or at least reduce some of the procrastination that has allowed maintained bank weaknesses to persist and harmed the transmission of monetary policy but, whereas the SSM has been fairly successful, resolution is still not working properly and needs further reforms. At the same time, banking union suffers from the problem that interventions from Brussels or Frankfurt are seen as infringements of national sovereignty that lack political legitimacy. The conflict between supranational and national interests is ultimately irresolvable but, if EMU is to survive, measures must be taken to limit its impact.