"As the Eurozone cautiously implements stabilising
reforms, Germany is forced to go further with concessions than it would prefer.
This
column suggests that it would be beneficial for discontented members to
consider the formation of a second monetary union. The second euro can be
constructed better than the first, bringing the discontented members
exchange-rate adjustments relative to Germany, and avoiding competitive
devaluations."
"A repeated question about the Eurozone is whether the
members form an optimal currency area. But another question – which is actually
closer to Mundell’s original contribution (Mundell 1961) – is whether the right
number of currencies in the Eurozone is as high as 18, the number of member
countries in the system. If the right number is neither 1 nor 18, then 2 may be
far, far better than either extreme.
Let me begin by
recalling the reasons why 18 would be too many. First, some of the members are probably small enough to have
no scope for using monetary or exchange rate policy as a tool of economic
stabilisation over the business cycle (McKinnon 1963). Next, the 18 members do
form an economically integrated group of geographical neighbours, and therefore
their mutual efforts to use monetary and exchange rate policy to their
advantage could easily lead them to enter into non-cooperative games with
costly Nash consequences. Finally, national monetary policy can mean
Treasury-dominated monetary policy, which can lead to very poor outcomes apart
from strategic games with any foreigners, near and far."
