June 18, 2012 1:43PM

Some Readings on the Economics of the Euro

As my colleague Marian Tupy observes, yesterday’s Greek election solved little. At best it buys Greece (and Europe) some additional time. The last couple of years of European crisis have encouraged me to re‐​visit (or in some case, visit for the first time) some of the literature on the economic benefits and costs of the Euro. What follows is list of readings that I’ve found useful for thinking about the Euro. That doesn’t mean I agree with all (or even most) but only such writings have been helpful in understanding the issue.

Just as the crisis was full swing in 2010, the Journal of Economic Literature published a useful summary article “The Macroeconomic Costs and Benfits of the EMU and other Monetary Unions.” As this paper notes, monetary union entails a country giving up one discretionary tool of macroeconomic management: monetary policy. The value of a monetary union is to some extent depend upon how well a country managed its monetary authorities. Its for this reason I suspect most Greeks don’t want to leave the Euro.

The Bank of Greece’s George Tavlas as also written a summary of the benefits of currency union, as applied to Africa. The literature review is worth the read.

The Journal of Economic Perspective has also published a number of accessible and very good articles, most of which are free on‐​line. I’d suggest starting with Phillip Lane’s “The Real Effects of European Monetary Union” which attempts to measure some of the trade benefits, among other things. In the same issue is a good paper on the financial market impacts. For a sense of the debate just before its introduction, see Martin Feldstein and Charles Wyplosz’s constrasting pieces in Fall 1997 issue.

Other worth‐​while reads are Chari and Kehoe’s “Time Inconsistency and Free‐​riding in a Monetary Union” which goes a long way to understanding the mess Europe is currently in.

Some opposition to the Euro is based upon the belief that flexible exchanges rates can be a “shock absorber” for macroeconomic distrubances (recall a currency union is bascially a set of fixed exchange rates). There is some evidence to suggest that flexible exchange rates can be more sources of shocks than absorbers, questioning the value of say Greece returning to a floating regime.

If you are up for some book length treatments of the issue, the best place to start is with Benn Steil and Manuel Hinds’ Money, Markets & Sovereignty. Barry Eichengreen’s Globalizing Capital is also a great treatment of the history, especially the arrangments that preceed the Euro.