The Limits of Monetary Treaty

Christopher E.S. Warburton

Published: June 2012

This paper examines the viability of monetary treaty. Using time series data, estimates of trade masses, trade trend ratios and the trade accumulation coefficient, it finds that the European monetary union is trade-creating. Descriptive statistics indicate that internal trade has been asymmetric and that a substantial amount of intra-European union real income has been transferred to non-members. The internal trade imbalances threaten the growth and welfare of the deficit members. In the absence of reciprocal intra-European Union trade and structural changes required to offset unemployment, the vitality of the union and the irrevocably pegged currency are severely compromised. The paper concludes that the trade-creating effects of the union is a necessary but insufficient condition for the preservation of the monetary treaty as it is presently constructed.

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