The continued arguments over common cents

Economics of Monetary Union - The Economics of European Integration
January 21, 2005

The market for textbooks on European integration is flourishing. Once there was a near-monopoly of UK-based authors (for example Dennis Swann, Peter Robinson, Michael Artis and Ali El-Agraa), but we now have a plentiful supply of excellent texts from all over Europe.

Paul De Grauwe's book is in its fifth edition, and Richard Baldwin and Charles Wyplosz have produced a text that is sure to become a standard work. These two works were published in 2003; they have a number of points in common and a number of differences. They are mainly aimed at advanced undergraduate students specialising in the economics of integration, but the style of both books makes them accessible to graduate students from other disciplines who know basic economics. Both books use quite advanced economic theory but present it in such a way that it can be understood by those with little more than a basic idea of supply and demand. This means that the authors deliberately avoid more than the very smallest amount of algebra or econometrics in their analysis.

In the case of Baldwin and Wyplosz, this does not prevent some quite technical material from being included. One of the unusual features of this text is the extraordinary breadth of coverage. In addition to the core macro and microeconomics, there are several elements that are rarely covered elsewhere, for example the political maths of European Union voting, growth theory, imperfect models of trade and competition. Sometimes the geometry can get a bit heavy. The amount of material in this book is something of a challenge for anyone wanting to use it as a text for a one-term course.

In contrast, De Grauwe's book is narrowly focused and, if anything, less technical. It takes everything at a much gentler pace and could probably be understood by almost anyone with a very basic knowledge of macroeconomics.

It is interesting to see that while De Grauwe is somewhat sceptical about the value of the optimal currency area theory, largely on the grounds that it gives too much emphasis to Keynesian rigidities, Baldwin and Wyplosz give it much more weight and suggest that it might be of some concern that Europe does not satisfy the criteria at the moment. I also feel that Baldwin and Wyplosz go further into the politics of European monetary union.

In terms of substance, a student reader of both these books is likely to come away with a rather sceptical view of the EMU project, and in particular the way it is tied to the Stability and Growth Pact. De Grauwe is cautiously optimistic about the net benefits of EMU, though he notes that it will not suit all countries. While Baldwin and Wyplosz tread a carefully balanced path most of the way, they nevertheless conclude quite sharply: "As a consequence, monetary union may worsen an already painful situation of high unemployment, at least in a number of countries." Both texts suggest that the motive for EMU was primarily political.

When it comes to the Stability and Growth Pact, both texts are even more sceptical about the arrangements that were in place when they were written.

They both argue that there is a case for some mechanism to guard against inflationary spill-overs from macroeconomic policy (and, by implication, deflationary ones) but both anticipate the demise of the Stability and Growth Pact. This very sceptical attitude about the way the EMU has been promoted contrasts with the overwhelmingly positive spin on trade integration that the literature gives.

Of course, by the time the next editions of these books are published, European macro policy may have been radically updated. Baldwin and Wyplosz are very much tuned in to the rapid evolution of the subject. Both books have companion websites. Like De Grauwe, Baldwin and Wyplosz have virtually all the diagrams in the book as PowerPoint files (but at 6 megabytes per chapter, do not try to put them on to a floppy disk). And Baldwin and Wyplosz have virtually a second book there in the form of a lecturer's guide, exercises and suggested essays. They probably provide more comprehensive website references in the text, while Baldwin's own website at the Institute of Advanced Studies in Geneva is an admirable resource for students and researchers alike (http://www.hei.unige.ch/ baldwin/).

In short, both these books are extremely useful. They can be used as reference books as much as textbooks and will no doubt continue the long march through the editions. They are ideal for undergraduate finalists. If a student wants to buy only one book, it would have to be Baldwin and Wyplosz's, but I would recommend that as many people as possible read both.

Peter Holmes is reader in economics, Sussex University.

Economics of Monetary Union

Author - Paul de Grauwe
Publisher - Oxford University Press
Pages - 258
Price - £.99
ISBN - 0 19 925651 9

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