How did we get to a monetary union in Europe?And what does it entail to have a EuropeanEconomic and Monetary Union (EMU) without a

full political union? Even in the midst of a chargeddebate about crisis prevention and management it isimportant to recall the origins of EMU and ask what itcan best achieve. As we will see, there are variouspolitical facets that matter for the success of EMU. Infact, short of political union, political commitment, will,and vision are of great significance - as is good politicaleconomy.

Monetary integration among a group of Europeancountries has been part of a broader process ofeconomic and financial integration that started over 50years ago. Needless to say this is a political process. Infact, the importance of the political origins, motivationsand consequences of European integration cannot beoveremphasised. Yet to label European integration solelyas the outcome of a political process is inaccurate.

To make our case we take two steps. In the first welook at the political commitment, will and vision thatwent into making European integration possible. Overthe last 50 years economic, monetary and institutionalintegration interacted and strengthened each other,profoundly changing Europe. But the global economyhas also changed presenting many new challenges, aswell as opportunities. In the second step, we look atsome implications of EMU's institutional framework inaddressing various structural weaknesses.

Along the way we make some observations that areneither exhaustive nor comprehensive. We stress the roleof macroeconomic shocks, such as the ongoingfinancial crisis, in moving the EU forward, and theimportance of adaptability and learning.

1st Step: One institutional frameworkand one market, and then one currency

Let's recall an index of institutional integration firstsuggested by Balassa (1961). The index identifies fivemain stages of integration among a group of partner

countries. Simply for convenience we illustrate the caseof the six founding countries of the EU, in short theEU6, that shared the whole route to the euro:

• In the first stage of integration the EU6 formeda Free Trade Area. Thus tariffs and quotas wereabolished for imports from area members;however national tariffs and quotas against non-member countries continued. Theimplementation of the Free Trade Area tooksome time as it started in 1957 and ended in1968.

• In the second stage the EU6 formed a CustomsUnion in 1968. A free trade area setting upcommon tariffs and quotas (if any) for trade withnon-members.

• In the third stage the EU6 formed a CommonMarket. Non-tariff barriers to trade wereabolished thus promoting the integration ofproduct and service markets. Restrictions onfactor movement were also abolished promotingthe integration of capital and labour markets.The European Single Market was formallylaunched in 1993, although the Common Marketwas already one of the objectives of the 1957Treaty of Rome: i.e., to establish the ‘fourfreedoms’.

• In the fourth stage the EU6 formed an EconomicUnion, thus a common market functioning witha significant degree of co-ordination of nationaleconomic policies and/or harmonisation ofrelevant domestic laws. The EU is currently anEconomic Union. Eurozone countries go even astep further as they are bound by the Stabilityand Growth Pact, a set of rules and criteriaguiding national fiscal policies with the aim offostering fiscal discipline.

·• In the fifth stage the EU6 pursued TotalEconomic Integration, i.e. an economic union

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POLICY INSIGHT No. 47 abcd

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Some observations on ‘political’ in EMUFrancesco Paolo MongelliECB and The JW Goethe University

a

with all relevant economic policies conducted atthe supranational level, while complying with theprinciple of subsidiarity. An example of TotalEconomic Intergration is the Eurozone whosemembers share the euro and have a singlemonetary policy. Eurozone countries also share atighter framework to review and coordinatenational economic policies.

To illustrate the deepening of institutional integrationwe assign scores from 0 to 25 to mark the developmentof, respectively, a Free Trade Area/Customs Union(considered jointly), a Common Market, an EconomicUnion, and an area with Total Economic Integration. Bysumming up the scores achieved at each moment intime, an index of institutional regional integration isobtained. It can range between 0, no integration, and100, full institutional integration (see Dorrucci et al(2004) for a detailed analysis). Forming a full politicalunion, akin to a sovereign state, goes beyond these fivestages. The figure below illustrates the evolution of theindex, as well as, the main steps toward monetary andfinancial integration.

Where do we stand in terms ofinstitutional integration? The EU6, but more generally the Eurozone as a whole,can be classified as being somewhere between aneconomic union and being totally economicallyintegrated. Some Balassa stages overlapped. Diversesupranational institutions were established already withthe 1957 Treaty of Rome, before the completion of the

common market, and were enhanced over the years. Anexample is the European Economic Community, createdin 1958 to spur the common market and theimplementation of the treaties. Another example is theEuropean Parliament that was ‘born’ as CommonAssembly of the European Coal and Steel Community of1952.

Over the last 50 years institutional integration hasgone through various phases. There was rapid earlygrowth driven mostly by ‘real’ economic integration.This was followed by a period of modest increases overthe 1970s and part of the 1980s, until a new period ofsurge in institutional integration driven by financialintegration. The sub-index of monetary and financialintegration grows very gradually until a morepronounced rise in the early 1990s driven by the stepstoward the completion of EMU. As the figure belowshows, plans had to be drawn, arrangements had to bemade, and countries had to prepare and then qualify forthe euro.

What else happened over the last 50years?

Looking back, we have witnessed a profound beneficialtransformation of all EU countries. There was aremarkable intensification of economic and financialintegration. For example, trade openness- captured bythe ratio of intra-regional trade in goods to regionalGDP - for the founding Eurozone countries rose fromabout 12% of GDP in 1960 to over 26% in 2002. Tradein services appears to have even higher increasesalthough statistics are scarce. Meanwhile, real dollar-denominated bilateral trade among Eurozone countriesincreased by about 1200%-1400% over this period. Realexchange rate variability has also declined over thedecades, as has inflation differentials. Equity marketreturn correlation in Europe has also risen as has GDPper capita and business cycle correlation (albeit withwide fluctuations).

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Trade openness- captured by the ratio of intra-regional trade ingoods to regional GDP - for the

founding Eurozone countries rosefrom about 12% of GDP in 1960 to

over 26% in 2002

Index of Institutional Integration for the EU6 (Belgium, Germany, France, Luxembourg, Italy, and the Netherlands), 1957 - 2007

0 10 20 30 40 50 60 70 80 90

100

1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Sub-Index of Monetary and Financial Integration

Monetary Union (1999) Common Market (1993)

EMS (1979)

CAP (1962)

Customs Union (1968)

Currency Convertibility

Monetary Union (1999)

Capital Market Liberalization EMS (1979)

Overall Index of Integration

Notes and Coins

Figure 1 Index of institutional integration for the EU6

Is there a two-way link betweeneconomic and institutional integration?

To answer we test for a systematic relationship betweenthe index of institutional integration and economicintegration proxied by trade openness. A simple Grangercausality Test shows that in 56% of the casesinstitutional integration Granger causes tradedeepening, whereas in 26% of the cases tradedeepening Granger causes institutional integration.Hence, the link from institutional integration to tradedeepening is very important. At the same time, thereverse link is also quite substantial, a finding alsocorroborated by using other measures of tradedeepening and by applying a Vector Error CorrectionModel (see Mongelli et al 2007). The two-way link canalso be generalised. In an earlier study we found a directpositive relationship between our index of institutionalintegration and an ‘index of OCA’ (Optimum CurrencyArea). This index is based on a ‘cluster analysis’ of alarge group of economic and financial variablescapturing increasing economic convergence, i.e.readiness to share a single currency (see Dorrucci et al(2004)). These findings justify our claim that to stampeverything as only having a ‘political origin’ isinaccurate. Let's now turn to the motivations.

Why did the two-way link advance forover 50 years?

In the early stages there were vast benefits from freetrade (that are still being obtained). Then came the

single market for goods, services and capital. Workersand companies are now allowed to move freely withinthe EU. Subsidies and regulations favouring domesticproducers are prohibited (a few exceptions emergedduring the ongoing financial crisis). The fundamentallaws governing economic activity - whether banking,industrial production, or consumer protection - are alsolargely harmonised. Perhaps it is easy to no longer seewhat has been under our eyes for so long, forgettingthis constant stream of benefits from the single market.Integration could only advance over many decades, alsothrough successive enlargements, by proving beneficialfor all participating countries .

A need to strengthen and defend theseachievements

But some new challenges have arisen over time. Theexchange rate mechanism currency crisis of 1992, andthe subsequent devaluation of the Italian Lira andBritish Pound, is a case in point. This crisis entailed largeswings in many exchange rate parities, strained financialsystems, and disrupted trade flows. Important lessonswere learned. Emphasis was then cast on completingnominal convergence and fulfilling the convergencecriteria of the Maastricht Treaty and completing theabove Stages of EMU. Thereafter the Stability andGrowth Pact became the focus. We will be able toexploit integration to the fullest only by reducingimpediments to the portability of pensions, and varioussocial services and benefits.

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Establishment of the European Monetary

Institute (EMI)

Ban on the granting of central bank credit to the

public sector

Increased co-ordination of monetary policies

Strengthening of

economic convergence

National central banks become fully

independent with price stability as their primary

objective

Preparatory work for Stage Three

Complete freedom for capital transactions

Increased co-operation

Free use of the ECU (European Currency

Unit, forerunner of the €)

Improvement of economic convergence

Start of preparatory work

for Stage Three

Maastricht Treaty becomes binding (February 1992)

Irrevocable fixing of conversion rates

Introduction of the euro in 11 EU Member States

Foundation of the

Eurosystem and transfer of responsibility for the

single monetary policy to the ECB

Entry into effect of the intra-EU exchange rate mechanism (ERM II)

Entry into force of the Stability and Growth

Pact

STAGE THREE 1 January 1999

STAGE TWO 1 January 1994

STAGE ONE 1 July 1990

Figure 2 Three stages of Economic and Monetary Union (EMU)

Observation 1

Over more than 50 years, institutional integration hasalso worked toward ‘consolidating’, ‘defending’, and‘promoting’ its two-way link with economic integration.For example, the euro supports the achievements ofEuropean integration but also fosters the completion ofthe single market and generated various benefits byitself.

Observation 2

Economic, monetary, and institutional integration, aredeeply interwoven. All EU countries, and particularlyEurozone countries, are highly interconnected. We arenow facing the worst financial crisis since the GreatDepression, and the ‘Greek crisis’ is also unravelling.Calls to leave the EU, or the Eurozone, entirely miss thecrucial point of European integration. There are enoughincentives to prompt any country to get back on trackand meet all requirements. Persistent irresponsibilitywould instead generate substantial negativeexternalities and could not be endured.

Observation 3

It has taken a great deal of political will, commitmentand vision to reach the current status of Europeaneconomic, monetary and institutional integration. Thisis remarkable and is widely acknowledged (see Buti et al2010, ECB 2008, and ECFIN 2008). Does this mean thatwe have reached an endpoint? I argue that the answeris ‘no’.

Step 2. One money, one market, andthen a new political economy

The euro is now shared by a group of sovereigncountries that do not form a single state. Neither is theEurozone likely to become a single state, in thetraditional sense of this term, in the near future. Thereis no federal budget that could buffer asymmetricshocks (like among US states), it can be awkward tocome to the rescue of a peer in need, and policymakingis significantly more complex than in a sovereign state.Yet, EU members already share some elements of a

constitutional framework. Over the last 50 years bits ofnational sovereignty were gradually transferred to thesupranational level. Various aspects need to beconsidered to grasp the ‘political’ in EMU:

a. Not long after the end of World War II it becameclear that a full political union among Europeancountries was not feasible. The choice was then madein the 1950s to pursue instead a Single Market.Therefore, the first aspect is that we have seenincreasing ‘functional’ political integration (see figurebelow). ‘Functional’ in the sense of aiming to pursueeconomic integration - in various steps and over time -and setting out the institutions, laws, and regulations toavoid the disastrous protectionist policies of the inter-war period. The EU Council, an inter-governmentalbody of the EU, and the European Parliament are theEU's supranational legislators. They are also fosteringthe harmonisation of national laws in several areas. TheEuropean Commission contributes to initiating commonpolicies and, inter alia, oversees the implementation ofEU laws and regulations. The European Court of Justicegives unity to European laws. Functional politicalintegration may further deepen as a result of theimplementation of the Lisbon Treaty that has broughttwo new institutional figures, a fixed term EU Presidentand an EU High Representative. The Lisbon Treaty hasalso increased the number of areas subject to majorityvoting, and as already said, the role of the EUParliament is being strengthened.

b. The second aspect is that Eurozone countries havedelegated sovereignty over several economic policies tothe supranational level. Monetary policy, exchange-ratepolicy, and competition policy (for the EU) are nowcentralised (i.e., they moved us toward total economicintegration in terms of the Balassa index above).Monetary policy has been transferred to the European

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Integration could only advance overmany decades, also through successive

enlargements, by proving beneficialfor all participating countries.

POLITICAL INTEGRATION

(State)

ECONOMIC INTEGRATION (Market)

MONETARY INTEGRATION (Money)

Economic i ntegration starting point

Economic i ntegration , then exerts pressure towards m onet ary i ntegration, and p olitical i ntegration

Figure 3 ‘Functional’ integration process (underlying the 1957 Treaty of Rome)

Central Bank (ECB) whose independence and pricestability objective are enshrined in the Maastricht Treaty.Exchange-rate policy has been transferred to the ECBand the EU Council that jointly decide on the exchangerate framework in consultation also with the Eurogroupand the EU Commission. The ECB is solely responsiblefor managing foreign-exchange reserves and forconducting foreign-exchange operations. Competitionpolicies and foreign trade policies are centralised by theEU Commission.

c. Growing economic integration generates moreinterdependence among EU countries. Each Eurozonecountry is more affected by developments in the partnercountries (due to trade and financial linkages), andthere are also increasing spillover from national policies.Hence, the third aspect is the need for better workingcoordination in several policy areas. There are variousdegrees of coordination. Close coordination is moreencompassing and is based on rules and peer reviewwhich may lead to joint decisions. Fiscal policy is subjectto close formal coordination. All Eurozone countriesstill set their national fiscal policies, but must do sowithin the rules and criteria set by the Stability andGrowth Pact. An Excessive Deficit Procedure is started ifthe fiscal rules are breached. Policies that are subject toSingle Market legislation are also subject to closecoordination.

d. Weak coordination, on the other hand, may includethe exchange of views and information, a commondialogue, and may lead to commonly agreed objectives(sometime in a not binding manner). Weak coordinationis prominent in the area of monitoring labour marketdevelopments and policies, product and capital marketpolicies, and external representation. These arepolitically sensitive areas and in which nationalgovernments may often have different preferences,special interests and background conditions.

Procedures and common standardssupport policy discussion andcoordination.

A few years ago the European Council streamlined theopen method of coordination and launched an EUAnnual Progress Report with a set of IntegratedGuidelines, a package including the EmploymentGuidelines that are added to the Broad Economic PolicyGuidelines. Such Broad Economic Policy Guidelines areendorsed annually by the EU Council; they grouptogether various macroeconomic and structuralrecommendation. In reality member countries do notoften follow these guidelines or bend them. Moreover,member states prepare National Reform Programmesthat have a three-year span but are updated annually.There is also a ‘Partnership for Growth and Jobs’, whose

progress is monitored through the National ReformProgrammes. The still ongoing financial crisis is nowleading to a redesign of the European regulatory andsupervisory system with the establishment, amongstothers, of a European Systemic Risk Board and aEuropean System of Financial Supervisors.

Observation 4

Eurozone countries are finding that their room formanoeuvre to conduct truly autonomous nationaleconomic policies is narrower than before EMU. On theother hand, each Eurozone country gains a better view,and might have a bigger say, on the policies undertakenby its partners. In fact, the more each country is astakeholder in the policy of others, the deeperintegration becomes. A case in point is the Eurogroup,a forum bringing together the Ministers of Finance ofthe Eurozone. Since the launch of the euro theEurogroup has evolved from a small-scale informal bodyaddressing mainly fiscal and exchange rate issues, intoa relatively formalised body under a permanentPresident. It addresses a broad set of Eurozone policyissues with institutionalised monitoring procedures andfollow-up requirements. It constitutes an importantchange in Eurozone governance (toward an economicunion in terms of the Balassa index above), and eachcountry has a voice in the discussion.

Over the last 15-20 years we have seen that theAchille's heel of various Eurozone countries has been ahapless economic performance driven by a combinationof factors including: low innovation and productivitygrowth, an erosion in competitive advantages, and lowor stagnant potential growth (sometimes referred to asthe ‘eurosclerosis’ although it has nothing to do withthe euro), lack of fiscal discipline and lack of reforms. Insome countries these factors were initially masked by aboost in aggregate demand upon entry in a lowinflation and interest rate environment. These factorsthat preceded the adoption of the euro are well known,they cannot go unabated and require some starkchoices to spur structural reforms. In fact, there havebeen various structural initiatives promoting forms ofEU-wide benchmarking. The Lisbon strategy for broadeconomic and social reforms was put forward in 2000and revised in 2005, but did not deliver as expected.The new Europe 2020 agenda for structural reformsrecently put forward by the EU Commission to fostersmart, sustainable, and inclusive growth is a narrowerand sharper exercise that deserves the utmostconsideration and support.

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Calls to leave the EU, or the Eurozone,entirely miss the crucial point of

European integration.

It has taken a great deal of political will, commitment and vision

to reach the current status ofEuropean economic, monetary and

institutional integration.

Observation 5

If we look at the political economy of EMU, the areascharacterised by single policy have delivered asexpected. The single monetary policy and the newmonetary policy framework have been successful. Wehad price stability and very low interest rates at allmaturities. The exchange-rate policy has workedfaultlessly. The single competition policy has also madestrides in the last decades. The areas characterised byclose coordination such as fiscal policies and structuralpolicies have instead shown more uneven results. Theareas characterised by weak forms of coordination arethe ones exhibiting the most pronounced unevenness.Thus lower potential growth and persistent intra-Eurozone imbalances must still be tackled.

What else do Eurozone countries share? By varyingdegrees, they all share numerous challenges, andopportunities. There are domestic (i.e., Eurozone)challenges such as the need for structural reforms tospur innovation and productivity (and thereby enhancegrowth potential). There is also a need to re-establishfiscal consolidation and coordinate national exitpolicies. All Eurozone countries face a rapidly ageingpopulation which strains national pensions systems,health provisions, and long-term care plans. There isalso the need for joint financial reforms and tackling ofissues such as the ‘too big to fail’.

There are also various common external challenges.Various forces are rapidly redefining world economicand financial balances and interdependence includingthe rapid decline in the cost of transporting goods andtravelling, the increasing role of knowledge andinnovation, and the speed of communication andinformation technologies. These forces are giving rise toa phenomenon labelled ‘globalisation’. There is also theneed to address climate changes. Moreover, reforms ofthe global financial system, and also the global financialarchitecture, are well underway.

Observation 6

Eurozone countries are exposed to relatively similarchallenges and systemic risks. So maybe there is areasonable expectation that some dysfunctionaldiversity will also slowly fade (Wyplosz 2010).

Some functions of government are still primarilyunder national control including the allocation role, theredistribution of income, the stabilisation of economicactivity, and the promotion of domestic growth andemployment. This is understandable due to thesubsidiarity principle, but also for accountabilityreasons, as well as, heterogeneous national preferences,historic reasons, and so forth.

Observation 7

As integration further deepens and the domestic andexternal challenges mount, some economies of scalecould well be realised. An example would be a commonforeign representation, or closer security policies, andthe provision of foreign aid. Interestingly, the highesttiers of the European defence and aerospace industryare already largely consolidated. Other industries arefollowing suit.

Concluding observations

Over the last two and a half years the world has beenstruck by a full-blown systemic financial crisis,unprecedented in size, if measured by financial lossesand fiscal costs, unprecedented in extent, if measuredby its geographical reach, and unprecedented in speedand synchronisation, if measured by the precipitous fallin worldwide economic output. Looking back, all majorcentral banks in the world have provided unprecedentedand exceptional policy responses. The ECB and theEurosystem were the first to act. The impact of the crisiswould have been far worse without such responses. Yet,the aftershocks of this financial earthquake are provingquite severe in the Eurozone. One reason is thatEuropean economies are all extremely open and worldtrade has significantly declined. But there are also otherreasons.

Three fault lines were gradually exposed by theongoing financial crisis. The first is an inability by somecountries to keep public finances durably under control.The second fault line reflects a gradual but persistenterosion of competitiveness in some countries. The thirdfault line is the low productivity growth. Countries atthe intersection of these fault lines may be at greaterrisk of derailment. What type of remedies andprevention are at hand? What can the institutionalframework of EMU best help achieve?

Observation 8

The institutional framework of EMU was deliberatelydesigned without any provision for mutual financialinsurance scheme - i.e., what the mooted EuropeanMonetary Fund may presumably deliver. This was notan involuntary omission. In fact such a scheme existsfor non-Eurozone EU countries, and is being used byseveral. The intent was to underpin the no-bailout ruleand strengthen national incentives toward fiscaldiscipline. In other words the presumption is that everymember keeps the own house in order. More or less,

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We had price stability and very lowinterest rates at all maturities. Theexchange-rate policy has worked

faultlessly.

For a young endeavour such as EMU alearning process is understandable.The crisis has taught us about thelinks between monetary stability,

financial stability, fiscal sustainability,and sound economic growth.

amidst some short-lived episodes of excessive deficitsover the last decade, this has been the case in mostEurozone countries. The fiscal story of EMU might havebeen very different without the Stability and GrowthPact. Obviously the incentives were not enough for allcountries, and member's disclosures have beensomewhat uneven particularly at the frontiers offinancial innovation. We are now facing a sovereigncrisis. Yet, Heads of States have the means and powersto remedy this if they choose to do so.

Observation 9

For a young endeavour such as EMU a learning processis understandable. The crisis has taught us about thelinks between monetary stability, financial stability,fiscal sustainability, and sound economic growth . Inparticular, three ‘lessons’ must be rapidly turned intoaction (but there are others).

The first is that the preventive arm of the Stability andGrowth Pact needs improvement to secure stress-testingand early detection of any possible fiscal troubles (seeJonung et al 2008). Yet we know that there can be nolasting fiscal consolidation if confidence and growth donot rapidly return.

The second lesson is therefore that agendas forstructural reforms should be given more teeth andbecome binding for those Eurozone countries in needof such reforms. But how should these teeth bedesigned to bite? The Europe 2020 agenda recently putforward by the EU Commission, as well as NationalReforms Programmes should be taken very seriously. Yetwe also know that sustainable growth and innovationneed the support of a sound and efficient financialsystem.

It follows that the third lesson is that enhancedfinancial regulation and supervision should notsuffocate whatever valuable in financial innovation andshould encourage further financial integration anddeepening across the EU/Eurozone. In fact, futuresustainable growth depends on it. The newly revampedfinancial regulation and supervision should provide apowerful counterbalance.

Observation 10

Hence, as in the past, macroeconomic shocks can spuradvancements in the EU. A shock as big as the currentfinancial crisis requires a leap forward. All three lessonsabove can be absorbed by the existing institutionalframework. In fact, existing institutions can bestrengthened rather than completely overhauled orcreating additional ones. We have also made a roughnew encounter with forgotten powerful deterrents. In

the aftermath of the crisis we have learnt that financialmarket based discipline can swing back and haunt high-deficit countries and that the political costs of lack offiscal discipline can also be daunting. These deterrentsare likely to linger for a long time. Such realisationshould definitely support the Stability and Growth Pact.

While Europe has profoundly changed, the globaleconomy has also changed. All EU countries now facevery similar domestic and external challenges - as wellas opportunities - that are rapidly redefining worldeconomic balances. Some of the forces at work are ‘toobig to handle’ for any country on its own. Yet, the mainchallenge now facing most Eurozone countries is abouttheir national economic governance and adaptability. Itseems almost a paradox. We are again calling forrenewed political commitment, will and vision, althoughthis time reform efforts must be oriented inward. Suchefforts can find support in the price stabilityenvironment and the increased resilience secured by theeuro. But there is also the support of over 50 years ofeconomic, financial, monetary and institutionalintegration that is continuing to deliver importantbenefits: a large single market.

References

Balassa, B (1961), The Theory of Economic Integration,Irwin, Homewood, Illinois.

Buti, M, S Deroose, V Gaspar, and J Nogueira Martins(2010), The Euro, Cambridge: Cambridge UniversityPress

Dorrucci, E, M Fratzscher and FP Mongelli (2004), ‘TheLink between Institutional and Economic Integration:Insights for Latin America from the EuropeanExperience’, Open Economies Review, 15: 239-260.

ECFIN (2008), ‘EMU@10: successes and challengesafter 10 years of Economic and Monetary Union’.

ECB Monthly Bulletin (2008) ‘The Euro at Ten: SpecialAnniversary Issue’.

Jonung L, M Larch and J Fischer (2008), ‘101 Proposalsto Reform the Stability and Growth Pact. Why somany? A Survey’, Public Finance and Management,8(3): 502-560.

Mongelli, FP (2010), ‘On the benefits and costs ofparticipating in a monetary union’, CEPR PolicyInsight 46.

Mongelli, FP, E Dorrucci, and I Agur (2007), ‘What doesEuropean institutional integration tell us about tradeintegration?’, Integration and Trade, (IADB),11(26):151-200.

Wyplosz, Charles (2010), ‘Europe's macro mess:Dysfunctional diversity that gets the job done’,VoxEU.org, 20 March.

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The Centre for Economic Policy Research, founded in 1983, is a network of over 700 researchers based mainlyin universities throughout Europe, who collaborate through the Centre in research and its dissemination. TheCentre’s goal is to promote research excellence and policy relevance in European economics. CEPR ResearchFellows and Affiliates are based in over 237 different institutions in 28 countries. Because it draws on such a largenetwork of researchers, CEPR is able to produce a wide range of research which not only addresses key policyissues, but also reflects a broad spectrum of individual viewpoints and perspectives.CEPR has made key contributionsto a wide range of European and global policy issues for over two decades. CEPR research may include views onpolicy, but the Executive Committee of the Centre does not give prior review to its publications, and the Centretakes no institutional policy positions. The opinions expressed in this paper are those of the author and notnecessarily those of the Centre for Economic Policy Research.

Francesco Paolo Mongelli is Senior Adviser in Directorate Monetary Policy at the ECB, and honorary Professorat the Johann Wolfgang Goethe University of Frankfurt. He holds a B.A. in Economics from the Free University forSocial Studies (LUISS) in Rome, and also a Master’s degree and a Ph.D. in Economics from The Johns HopkinsUniversity in Baltimore. He has worked at the ECB since 1998 holding various positions, including as organiser of theanalytical agenda of DG Economics, and editor of the ECB Occasional Paper Series. Prior to that he spent severalyears as an economist at the International Monetary Fund in Washington. Mr. Mongelli’s main area of researchpertains to the effects of the euro on the functioning of EMU, the links between monetary policy and heterogeneityin the euro area, the links between economic integration and institutional integration, and comparing monetary policypreparation and the decision making in the main central banks. He also teaches Economics of Monetary Unions atthe Johann Wolfgang Goethe University of Frankfurt. His papers have been published in various scientific and policy-oriented journals, such as the Open Economies Review, the Journal of Money Credit and Banking, the Journal of CommonMarket Studies, Integration and Trade, Economie Internationale, Bancaria, and the Journal of Economic Integration.