The economics of the single currency

Abstract

This chapter looks at how the idea of a single currency came into being and explores the underlying economic and political rationale of one legal tender for the European Union. The costs and benefits of a single currency are discussed. The chapter then looks at the theory of the optimum currency area (OCA) and discusses whether the EU can be considered to fall within this category. The Treaty of Maastricht and the Stability and Growth Pact (SGP), together with other provisions falling under the EMU acquis, provide the legal framework for the single currency, the euro. The European system of central banks provides the institutional set-up. The final part looks at the issues related to monetary and fiscal polices within a monetary union, and discusses whether a single monetary policy would require a single fiscal policy.