The road to Economic and Monetary Union

This paper discusses various issues involving EMU. In evaluating the potential benefits of EMU we stress that the elimination of asymmetric financial shocks enhances confidence in the sustainability of a well-functioning internal market. The convergence criteria reflect both the strong negotiating position and the lack of trust of the EU countries with strong financial discipline (and Germany in particular) vis-a-vis their potential EMU partners. Moreover, Germany has sought assurances from its potential EMU partners that they would keep to the rules after the single currency has been established. In this connection, we discuss two alternative ways to reconcile fiscal discipline with flexibility for member states to determine their fiscal policy at a decentralized level. The paper also discusses the relationship between the EU countries taking part in EMU immediately and the other EW countries that cannot or choose not to take part. Finally, we assess how EMU might affect the labor market, social security, and employment.