Working Paper: CEPR ID: DP2366
Authors: Willem H. Buiter
Abstract: Microeconomic efficiency and market transparency argue in favour of UK membership in EMU and for Scotland's membership in the UK monetary union and also in EMU.UK seigniorage (government revenues from money issuance) would be boosted by EMU membership.Lender of last resort arrangements would not be substantially affected by UK membership in EMU.The UK is too small and too open to be an optimal currency area. The same point applies even more emphatically to Scotland. The 'one-size-fits-all' , 'asymmetric shocks' and 'cyclical divergence' objections to UK membership are based on the misapprehension that independent national monetary policy, and the associated nominal exchange rate flexibility, can be used effectively to offset or even neutralise asymmetric shocks. This 'fine tuning delusion' is compounded by a failure to understand that, under a high degree of international financial integration, market-determined exchange rates are primarily a source of shocks and instability. Instead, opponents of UK membership in EMU view exchange rate flexibility as an effective buffer for adjusting to asymmetric shocks originating elsewhere. I know of no evidence that supports such an optimistic reading of what exchange rate flexibility can deliver under conditions of very high international financial capital mobility.The economic arguments for immediate UK membership in EMU, at an appropriate entry rate, are overwhelming.Monetary union raises important constitutional and political issues. It involves a further surrender of national sovereignty to a supranational institution, the ECB/ESCB. It is essential that this transfer of national sovereignty be perceived as legitimate by those affected by it. In addition, the citizens of the UK have become accustomed to a high standard of openness and accountability of their central bank since it gained operational independence in 1997. The ECB/ESCB must be held to the same high standard, and, while there are grounds for optimism, there still is some way to go there.
Keywords: European Economic and Monetary Union; Asymmetric Shocks; National Sovereignty
JEL Codes: F31; F33; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| microeconomic efficiency (D61) | economic benefits (D61) |
| UK membership in EMU (F36) | increase in seigniorage (E59) |
| size and openness of an economy (F43) | suitability for fixed exchange rates (F33) |
| independent monetary policy cannot effectively counter asymmetric shocks (E61) | exacerbation by high financial integration (F65) |
| exchange rate flexibility (F31) | increased economic instability (F69) |
| expected economic benefits of EMU membership (F36) | practical outcomes (D78) |
| choice of exchange rate regime (F33) | natural rate of unemployment (J64) |
| temporary real shocks (E32) | lasting effects due to nominal rigidities (H31) |