Plan What conditions are necessary for the successful operation of a monetary union? Assess how far the Euro-zone meets these conditions in practice. Lack of success: Greece etc Hasn’t always been so successful Similar economies EU was created as a goal of single currency Need for monetary union: https://www.investopedia.com/terms/o/optimum-currency-area-theory.asp Pros: Cost of changing currency Easier access to loan increases budget deficit Trade openness is needed for a successful monetary union because countries benefit from increased trade due to having no costs of trading between the members of the monetary union. This increased trading is important as it means the countries will have higher gains from adopting a single currency for example the reduction in transaction costs will have a large affect as firms save money when doing transactions in the Euro-zone allowing for it to be invested elsewhere. Trade openness was the first condition the Euro-zone countries met due to common market. The common market was initially created without the intention of a monetary union, however by late 1960s “economic and monetary union was a recurring ambition for the European Union”. (https://europa.eu/european-union/abouteu/euro/history-and-purpose-euro_en). The European economic community which later became the EU was initially created to help its member countries benefit from trade liberalisation so abolished tariffs and barriers to trade within the common mar Mckinnon http://www.europarl.europa.eu/workingpapers/econ/104/chap1_en.htm McKinnon´s (1963) main criterion was the degree of openness in an economy, linked to the relative importance of traded to non-traded goods. A high degree of openness reduced the effectiveness of an autonomous monetary policy, and limited the usefulness of exchange-rate changes as a means of restoring competitivity, since devaluation rapidly fed through into domestic prices.
