Type of Publication: Article in Journal

Lessons from German Monetary Union for European Monetary Union

Clausen, V.; Willms, M.
Title of Journal:
Journal of International and Comparative Economics
Volume (Publication Date):
3 (1994)
Number of Issue:
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The paper analyses the macroeconomic effects of monetary union in Germany (GMU) and tries to draw conclusions for European Monetary Union (EMU). For Germany, currency conversion led to a substantial appreciation in East Germany and contributed there to a decline in production and to heavy unemployment, necessitating high fiscal transfers. Interest rates rose, the DM-exchange rate appreciated and the capital account turned into a deficit position. On the other hand, it seems that money supply, money demand, and inflation have only been influenced in the short run. It can be shown that many of the problems experienced in Germany result from the joint and rapid introduction of the monetary, economic and social unification with a former socialist country. Therefore, if EMU is introduced as a separate affair costs and benefits will be relatively small, especially once wages are allowed to be flexible. The basic lesson from GMU for EMU is not to overloook the problems associated with a social union in Europe and not to underestimate the pressure towards wage equalisation in a monetary union.