However some challenge the conclusion some claim the

However, some challenge the conclusion. Some
claim the results would not be duplicated when applied to large countries such as the
members of the EU; another study found out that leaving a common currency area as Ireland
did has not caused a reduction in UK - Ireland trade.
22. Explain why the European Union’s current combination of rapid capital migration
with limited labor migration may actually raise the cost of adjusting to product
market shocks without exchange rate change.
Answer: If the Netherlands suffers an unfavorable shift in output demand, Dutch capital can
flee abroad, leaving even more unemployed Dutch workers behind than in the case of
government regulations that were to hinder the movement of capital outside the Netherlands.
Severe and persistent regional depressions could result, worsened by the likelihood that the
relatively few workers who did successfully emigrate would be precisely those who are most
skilled, reliable, and enterprising. This is another example of the theory of the second best .
23. “Given that labor remains relatively immobile within Europe, the European Union’s
success in liberalizing its capital flows may have worked perversely to worsen the
economic stability loss due to the process of monetary unification.” Discuss.
Answer: Probably right. This is another example of the theory of the second best . If the
Netherlands suffers an unfavorable shift in output demand, Dutch capital can flee abroad,
leaving even more unemployed Dutch workers behind than in the case of government
regulations that were to hinder the movement of capital outside the Netherlands. Severe and
persistent regional depressions could result, worsened by the likelihood that the relatively
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few workers who did successfully emigrate would be precisely those who are most skilled,
reliable, and enterprising.
24. Discuss the problems that the EMU will face in the coming years.
Answer: pages 631-632. (1) Europe is not an optimum currency area; therefore asymmetric
economic developments within different countries of the euro zone that call for different
interest rates cannot be implemented. (2) The political part of the unification is much weaker
and may limit the political legitimacy of the economic unification. (3) On the one hand, labor
markets remain highly unionized and subject to high government unemployment taxes and
other regulations impeding labor mobility. On the other hand, capital has high incentive to
migrate to the EMU countries with the lowest wages. (4) Constraints on national fiscal
policy are likely to be painful due to the absence of substantial fiscal federalism (fiscal
transfer of resources from the rich to the less rich countries within the European Union). (5)
The EU is considering a large-scale expansion of its membership into Eastern Europe and the
Mediterranean. This will cause many coordination costs and also the issue of representation
of small and big countries.