The Real Effects of EMU

We investigate the impact of EMU on the economies of the member countries. In terms of the suitability of a common monetary policy, inflation differentials in the euro area have been quite persistent, such that cumulative intra-EMU real exchange rate movements have been substantial and EMU has amplified national business cycles in several member countries. At the same time, EMU has substantially contributed to greater economic integration among the member countries. However, economic linkages with the rest of the world have also been growing strongly, such that the relative importance of intra-EMU trade has not dramatically increased. In terms of future risks, a severe economic downturn or financial crisis in a member country will be the proving ground for the political viability of EMU