Well, we keep hearing about Spain/Greece vs California and how US Monetary system is more effective and EMU (European Monetary Union) is not.
This blog has always wondered – how about other countries? How do they work as a monetary union?
Worthwhile Canadian Blog throws some light on Canadian Monetary Union. He points how state of Ontario is like Spain in terms of macros:
I sometimes like to look at Canada through the eurozone lens: both are monetary unions in which certain regions have done better than others. For example, there are some interesting parallels between Spain and Ontario, in particular, the fact that employment losses in Spain and Ontario were disproportionately larger than employment losses elsewhere in Europe and Canada.
So this post addresses the question of to what extent Spain’s and Ontario’s problems are due to the fact that they are obliged to live with a monetary policy stance that is not necessarily designed in their interests. Or is the problem the monetary union itself?
He points how Ontario’s and Spain’s fortunes differ. In Ontario, trade balances are more towards rest of the world. In Spain, trade balances are more with Euro region. So, Spain has two problems. One it needs to be cheaper than its Euro partners which is not possible. Two, Euro needs to depreciate to allow Spain to make some gains in trade balances with others. Which is also not happening.
So overall Spain gets really hit by being a member of EMU:
Spain has been doubly-badly-served by monetary policy:
- Since it cannot depreciate against the rest of the euro zone, the way that its exports can become more competititive is to reduce costs, and particularly wages. As it is, the reduction in its EU trade deficit has taken the form of a sharp reduction in imports, and not an increase in exports.
- It would help Spain if the euro would depreciate further against the rest of the world, but that doesn’t seem to be happening, either.
In Ontario, the second point probably applies, but not the first: Ontario’s problem is not its ability to export elsewhere in Canada. So the Canadian monetary union per se is not the problem for Ontario that it is for Spain.
This is just a small example. But shows problems with EMU. The imbalances became really large before people took note. Need to put up some data for Indian states as well to understand the Indian monetary union and its effectiveness…