Economics of Monetary Union

May 27, 2010

Author: Paul De Grauwe

Edition: Eighth

Publisher: Oxford University Press

Pages: 304

Price: £35.99

ISBN 9780199563234

The euro, the principal focus of this book, is one of the greatest economic experiments of our times. While fixed exchange rates have been tried and tested in economic history, full monetary and currency union entered upon by choice by the respective economies is rare. Although it is therefore possible for economists to say something about the theory, we remain in untested waters with regard to its real-world consequences for jobs, inflation and growth.

De Grauwe provides an eloquent and clear outline of the economic costs and benefits of monetary union. Going on to apply the theory, he tidily addresses the question of whether the UK should join the euro and, new to this edition, he also considers the potential for monetary unions in Latin America, Africa and Asia.

In the second half of the book, De Grauwe looks at the practical issues of monetary union in Europe, considering the European Central Bank, monetary policy, fiscal policy and finance - all updated in the light of the recent recession. With respect to monetary policy, he discusses the need for greater banking regulation, the logic of "lender of last resort" action during the crisis, and whether there is a trade-off between price stability and financial stability. In the chapter on fiscal policy, he considers the fiscal consequences of the crisis, including increasing bond spreads within the eurozone - something that has been playing itself out in Greece.

What is arguably missing is a discussion of economic imbalances in the current account positions of the eurozone economies. Keynesian economists may be unhappy with this. However, supply-side economists will be pleased to find a discussion of the diverging competitiveness seen in the eurozone since its inception. Whichever school of thought one adheres to, there remains a major challenge ahead - and how this is met is likely to be key to the future of the regime. This leads us to another question: what are the immediate economic costs to an economy of leaving a monetary union? This has been considered by Barry Eichengreen, but will have to wait for a later edition of De Grauwe's book.

Troubled economic times are the most testing and the current recession is testing the euro to its limits. De Grauwe knowledgeably incorporates the recent global financial crisis and, in particular, its implications for monetary and fiscal policymaking in the eurozone. Given the rate at which economic events are now developing, this will be either the eighth of many future editions or - sceptics may predict - the last. Either way, it is worth the reinvestment this time around.

Who is it for? Economics undergraduates.

Presentation: Clear explanations, helpful diagrams and up-to-date facts.

Would you recommend it? Yes.

Highly recommended

Intermediate Microeconomics: A Modern Approach

Author: Hal R. Varian

Edition: Eighth international

Publisher: W.W. Norton

Pages: 816

Price: £40.99 and £23.99

ISBN 9780393935332 and 5158

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