Prospects for Monetary Union After the Euro
Edited by Paul De Grauwe and Jacques Melitz
The MIT Press, Cambridge, MA, 2006, pp. 336 \$45.00/£29.95 (Cloth).
ISBN 0-262-04230-4

928 words.
To appear in the Review of Political Economy.
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The Euro is a fait accompli, and modern monetary and international economics must take account of the new status quo. Prospects for Monetary Union after the Euro collects the proceedings of a 2003 conference aimed at answering the following three questions: First, given the Euro's existence, what is the opinion of the profession about monetary unions in general? Second, In the case of enlargement of the European Union (EU), what are the consequences for accession countries of adopting the Euro? Third, how does the existence of the Euro affect the running of Eurozone labour and financial markets?

There are 11 chapters following the usual brief introduction by the editors. The first five chapters concentrate on the effects of enlargement on the Eurozone. The sixth chapter spends its time asking what benefits the United Kingdom gained from the Euro's introduction. Chapter seven uses panel data to estimate the effects of EMU on member state's bilateral trade. The rest of the book concentrates on modelling asymmetric shocks in governmental insurance markets and outright dollarisation versus regional monetary union in South America and East Asia. The final chapter contains a detailed analysis of monetary unions that have failed.

The dominant modeling methodologies throughout are, in order of frequency: panel dataset econometrics (Chapters 4, 7, 8, 11 and 12),  Real Business Cycle theory (Chapters 2 and 9) and dynamic game theory (Chapters 3 and 5).

Chapters 2, 3, and 4 ask simple questions of the enlargement process, considering simulations of likely convergence paths for accession countries in a Real Business Cycle framework (Chapter 1), an estimation of costs of structural reforms in an accession country (Chapter 2), finding out how intra-EU trade will be affected by the presence of possibly more favourable conditions in newer countries (Chapter 3) and the influence of productivity differentials on the exchange rates of four accession countries. The rest of the chapters are focused on interesting and topical questions relating to the adoption of a currency. Particularly interesting are Chapters 11 and 12. Chapter 11 asks a fascinating question: what are the prospects for a pan-Asian currency union which includes China, Japan, and Korea? The authors concludes quite reasonably that a preferential trading agreement is very likely, given the recent moves by China and Korea to normalise their trading relationships. Chapter 12 asks what happens when currency areas die. Nitch takes the view that a large number of macroeconomic variables must be brought to bear on the problem of currency area dissolution, and constructs a massive model where it would be very difficult to see the wood for the trees, but for Nitch's skill of exposition.

While the papers are technical and largely data driven, the exposition and presentation is of high quality, and the editors are to be commended for the focus they place on analytical and empirical analyses from a unified methodological standpoint. There does seem to be a lack of a  political economy viewpoint in the volume. The EU is an economic solution to a political problem, but the problems that created the present EU persist, so why can't we view the accession countries through the lens of political economy? As an example, the inclusion or exclusion of Turkey into the EU will have to be considered in a political economy framework before standard RBC models can be force-fitted onto some large panel dataset and estimated to oblivion, if we are to gain some insight into how these systems behave when coupled through a common currency.

Given the well documented political struggles that took place to move the Euro from an idea to a reality, might have drawn some consideration from one of the authors. Most of the volume is concerned with the possible effects of enlargement, and so the book's theme is largely topical. Also, the book lacks a truly dynamic modeling approach given by discrete dynamical systems and simulation, which would have been ideal for the questions asked in Chapters 11 and 12, for example. Given DeGrauwe's expertise in the area of chaotic and nonlinear dynamical systems, it is a pity this work wasn't carried out.

There is a nice speculative look at an Asian currency union and the costs and benefits of full dollarisation, even if the analytical lens is panel data estimation only. A very careful data analysis with overtones of political economy is carried out in chapter 12, based mainly on Glick and Rose's 2002 dataset. Chapters 11 and 12 are, in my opinion, the best chapters in the book, though Chapter 9, pgs. 228 and 229 provides an extremely good summary of the recent literature on the costs of partial and full dollarisation, which taught me a lot about the area in a short space of time.

The chief contribution of the book to the debate is the quantification of gains and diversionary elements to trade liberalisation and market integration from the further enlargement of the European Union. When the dust settles on the European project, I'm sure this book will be seen as a milestone in academic thinking on the subject.

References

Glick, R., and Rose, A.K. (2002) Does a currency union affect trade? The time series evidence. European Economic Review, 46 (June): 1125--51. (Link to the 2001 working paper.)

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