bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

than one currency. However, the question is more complex than this for two
reasons.
Firstly, the composition of the area is important. In practice, we are not
concerned with the idea that an existing single currency area (such as the
UK or France) should introduce additional currencies, even if this seemed
justified by a strict application of optimum currency area theory. 1 Rather,
we are interested in which existing nation states should give up their currencies
and join a single currency area. Thus, we ask which countries
should be members and this introduces considerations other than the geographical
area of the union.
Secondly, the size of both the costs and benefits of a group of countries
moving to a single currency and a single monetary policy is uncertain and
strongly disputed. This is true of the economic costs and benefits considered
alone and is true, a fortiori, when one acknowledges that the movement
to a single currency is inevitably a political as well as an economic project.
This is especially true in the case of Europe where integration has always
been expected to deliver dividends in terms of lasting international peace
and harmony. Here, we shall largely endeavour to keep to economic arguments,
but the political issues cannot be forgotten.
Pause for thought 13.1:
We cannot, then, be precise about the size of an optimum currency area.
All we can do, at most, is to ask whether the benefits of a single currency
appear to outweigh the costs for a specified set of countries — for example,
the current 12 of the euro area, the EU 15, or the enlarged EU we are likely
to have in the near future. To do this, we start by enquiring about the
characteristics of groups of countries for which the costs of adopting a single
currency are likely to be low. These are based on the idea that the principal
costs are:
(a) the loss of the ability to adapt to changing economic circumstances
by altering the exchange rates between the currency of the domestic
economy and those of the other member countries and
(b) the loss of an independent monetary policy.
MONETARY POLICY IN THE EUROPEAN UNION 377
Do not peace and harmony, in turn, deliver economic benefits? Is it ultimately
possible to distinguish clearly between economic and political factors?
Box 13.1 sets out the most important of these characteristics.