Success and failure of a monetary union

The European Monetary Union consists of 17 members with a common central bank and a common currency. After creation of a monetary union, each individual country loses control over its independent monetary policy. However, this loss may not be so costly if the business cycles of the member countries are symmetrical. The European Monetary System was highly successful in controlling inflation among the member countries during 1979-1992. In a monetary union, with a credible central bank, there is a stronger commitment for price stability than in a currency area. This study attempts to provide a theoretical framework for a monetary union with empirical application to the European Monetary Union. Based on the data on five European countries, the empirical results of the research indicate that business cycles of selected countries are asymmetric. Unfortunately, because of asymmetry of member states’ economic conditions and a lack of political union, weaker members of the European Monetary Union have experienced debts crises threatening the stability of the union. Some policy issues concerning sovereign debt crises and possible disintegration of the European Monetary Union are discussed.