European Monetary Union to break-up or see additions?

The EU set up is quite complex. There are 27 economies which are members of the European Union but only 15 have adopted Euro as their currency (see the list here). These 15 have abandoned their monetary policy and have given the same to one Central Bank – ECB. These 15 are said to members of European Monetary Union (EMU)

The current set of events has put entire EU in an interesting (and dangerous) twist. All economies under EU have been caught under severe economic and financial stress. This has divided the members into 2 lists:

• The members of EMU (15 economies) are feeling the pressure of staying in the EMU. They can neither use monetary policy  to stimulate their economies nor use fiscal policy and provide fiscal stimulus as they are under the Stability and Growth pact. Read the superb articles by Simon Johnson and Martin Feldstein for some clarity on the matter. The list of economies under this are:

Austria	Italy
Belgium	Luxembourg
Cyprus	Malta
Finland	Netherlands
France	Portugal
Germany	Slovenia
Greece	Spain
Ireland

• The other set that are not members of EMU for different reasons. For instance UK, Denmark and Sweden can become members but have not chosen to. The others need to work on the conditions in the growth and stability pact before they can become members. This group is feeling pressure to join EMU more than ever before mainly to protect their falling currencies. Euro currency has taken a beating but has still been much better shaped than others. The list of economies under this are:
  

  Bulgaria	Lithuania
  Czech Republic	Poland
  Denmark	Romania
  Estonia	Slovakia
  Hungary	Sweden
  Latvia	United Kingdom

  This list of joining Euro currency also includes economies that are not yet members of EU like Iceland and Russia.

As Feldstein and Johnson point out, EU is going to face a real crisis going ahead. It is going to test its policymakers to the hilt and would have to ensure that it does not break-up.

ECB has just completed 10 years (it was established on 1 June 1998) and Euro will complete 10 years old on Jan 1 2009 (started on Jan 1, 1999). It hasn’t faced a crisis like this in past 10 years and even asking members to join in might have been a lot easier. European policymakers also take a lot of pride in ECB (read Trichet’s interview) and its policies. The path ahead will be very tricky and testing.

Update:

Barry Eichengreen provides his excellent insights as well.