Post-COVID-19 EMU: Economic Distancing by Parallel Currencies
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Economic and Monetary Union
Thomas Mayer and Gunther Schnabl
Post-COVID-19 EMU: Economic Distancing by Parallel Currencies The coronavirus crisis has caused new distress in the European Economic and Monetary Union (EMU), as the southern part of the EMU has been hit stronger than the northern part. The common currency prevents nominal exchange rate adjustment in response to the asymmetric shock. Policymakers have therefore taken recourse to large-scale financial transfers. Based on the lessons from the German monetary union, this article proposes instead the introduction of parallel currencies to facilitate relative price changes. Parallel currencies in the south would allow an increase in competitiveness of the south via real depreciation. The introduction of a parallel currency in Germany would lead to capital inflows and a real appreciation of the new German mark. The pre-EMU pressure for structural adjustments and productivity gains would be restored. The coronavirus crisis has caused new distress in the European Economic and Monetary Union (EMU). Italy and other southern European countries accuse northern European countries, in particular Germany, of not doing enough to help in economic crises. The €750 billion Next Generation EU plan, which was announced as “a magnificent signal of solidarity and willingness to reform” (European Commission, 2020a) may bring temporary relief, but it will not address the main problem of the euro area: real economic divergence. This has been further aggravated by other coronavirus countermeasures, including border closures that have interrupted tourist flows to southern European countries for a prolonged and indefinite period of time. In the short term, asymmetric shocks in a monetary union can be softened by targeted credit from the European Central Bank (ECB) or other unconventional monetary policy operations (Sonnenberg and Schnabl, 2019). Yet, in the longer run, the growing real divergence in the European monetary union cannot be countered by financial means. Transfers and cheap central bank credit (with softened collateral conditions) will facilitate the postponement of necessary reforms and the restructuring of enterprises (Acharya et al., 2012). Increasing © The Author(s) 2020. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre for Economics.
real divergence is likely to increase dissatisfaction about the EMU in southern European countries and may induce voters to elect populist politicians promising a remedy through an EMU exit. As a result, the EMU could break apart. However, a sudden break-up of the monetary union would cause major turbulences in financial markets and have far-reaching political consequences at the European and global level. In our view, it would be preferable to safeguard against such a cataclysmic event by introducing parallel currencies as a safety valve. Parallel currencies
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