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The Economics of Convergence towards Monetary Union in Europe

By Paul De Grauwe

Abstract

This paper surveys the literature on monetary integration to discover the economic rationale of the Maastricht convergence requirements. The traditional theory of optimum currency areas is silent on the need to have Maastricht-type convergence requirements. The new view of monetary integration based on models incorporating credibility concepts can be used to justify the budgetary convergence requirements. It cannot easily be used to justify the nominal convergence requirements. The paper argues that the dynamics of the convergence requirements will almost certainly lead to a `Great Divide' of the European Union which endangers the level of integration achieved today. We therefore conclude that less emphasis should be put on prior convergence conditions and more on strengthening the functioning of the future monetary institutions of the Union.Monetary Integration

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