The recent European debt crisis started a debate over the efficacy of monetary unions. I think that the efficacy of such monetary unions were never in doubt. Economists all over the world are unified in agreeing that such unions are always advantageous for member countries. The recent flop of the EU union, however, created question marks over its efficacy. However, intelligent economists and political leaders all over the world are still optimistic about efficacy of these unions. (Brue & McConnel, 2003) The EU debt crises erupted because the management of EU union was not up to the market.
The management caused the downfall and it was not that the entire concept of a monetary union has become invalid. Still there is more to gain from such unions than losses. These unions are ideal for reducing the balance of payments deficits are improving that macroeconomic conditions of the economy and at the same time controlling galloping rates of inflation. In fact these unions are so effective that many Asean countries and Ex-USSR states are considering about forming monetary unions. This is a signal that the system is not flawed and the fault lies in the management of the monetary union in the case of EU.
(Lipsey & Chrystal, 2003) There are plenty of good outcomes that can be enjoyed by union members. First of all it leads to the regional efficiency. Different member countries produce what they are good at and what they can produce at lower cost than other member countries. This means that a lot of precious scarce resources are saved when using the system of monetary union. Similarly, it controls inflation because one country does not have authority to print money for its own uses.
Even if it has sovereign debts and obligations to settle, it is asked to engage more actively in trade and more money is not printed in order to settle its debts. This is particularly important in preventing inflation and devaluation of currency which are two basic aims of all macroeconomic policies. It also reduces the government borrowing and spending. This leads to reduction in the crowding-out effect and more money is circulated in the economies of member countries which lead to employment creation opportunities in the economies of modern countries.
Labor and Capital also become mobile after the creation of such monetary unions. This is important because it leads to best return on capital. The country offering the best return to resources and capital attract the free capital and labor. This leads to improvement in efficiency of all member countries to provide the better return and wages. As a result of all this, earning potential of labor and capital is increased greatly and standard of living of masses of the member countries improves greatly.
(Kauppi, Widgren & Carrillo, 2004) The above points clearly show that if these unions are managed well then there are great benefits that can be obtained from these economic relationships. This point is supported by the fact that despite the failure of Greece, Ireland and Portugal, different regions are interested in forming monetary unions such as Asean and Ex-USSR states. References: Brue, S., & McConnel, C. (2003). Economics. (4 ed. , pp. 32-43). New York, NY: Prentice Lipsey, R., & Chrystal, A. (2003). Economics. (4 ed. , pp.
43-60). Oxford, England: OUP Kauppi, H., Widgren, M., & Carrillo, J. (2004). What determines eu decision making? needs, power or both? . Economics Policy, 19(39), 259-270.