Essay on The Impact of European Monetary Union

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I. Introduction
According to Lane (2006), the European Monetary Union (EMU) began on the year 1999. Following his line of analysis and reasoning, this paper shall seek to analyze the purported impacts of the said action in the light of their inflation rates and the proportion of their portfolio holdings allocated to the other members of the Euro-zone. Furthermore, the author of this paper shall look qualitatively in the current Asian context to examine the relevance of a monetary union in the continent. Further, this study is limited to the following European countries:
1. Belgium
2. Germany
3. Ireland
4. Greece
5. Spain
6. France
7. Italy
8. Luxembourg
9. Netherlands
10. Austria
11. Portugal
12. Finland

II. The Impact of the Maastricht
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To explain this phenomenon, Lane (2006) concluded that changes in bilateral real exchange rates can only take place through the differentials in inflation rates since by definition, nominal exchange rates are fixed. The innate differences of the countries involved in terms of the different factors of productions will lead into variations of productivity growth (Lane, 2006). Additionally, Honohan and Lane (2003) stated that such differentials are also needed because the countries begin with different price levels to converge towards a singular price level in the short run.

The large and persistent inflation rates differential, coupled with a common and fixed nominal interest rate among the member- countries translate into differences of real interest rates among the nations in question. Thus, countries with relatively higher medium term inflation enjoy lower real interest rates, stimulating demand. Since countries with higher inflation rates experience higher costs of production, its competitiveness against the countries with lower inflation rates will fall. In the words of Honohan and Lane (2003, pp. 5- 6):

“An in-built adjustment problem for a currency union is the pro-cyclical interplay between regional inflation and real interest rates. Since any intra-union real

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