A Detailed Report on Monetary and Economic Integration Dynamics

This report provides a comprehensive overview of monetary and economic integration. It begins by defining monetary integration, also known as monetary or currency union, and discusses its two key components: exchange rate union and scope of convertibility, using the EMU and Eurozone as primary examples. The report then details the pros and cons of monetary integration, such as reduced transaction costs and interest rates versus loss of monetary independence. Following this, the report defines economic integration and its various stages, highlighting the advantages like increased trade and economic growth, and disadvantages like loss of sovereign power. The report further explores the effects and stages of monetary integration leading to economic integration, emphasizing the benefits of a single market, policy convergence, and political stability. Finally, the report discusses the application of monetary integration on a global scale, using the EMU as a prime example of successful economic and political stability, increased trade and employment. References from academic journals and books are included.

Running head: MONETARY AND ECONOMIC INTEGRATION
Monetary and Economic Integration
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1MONETARY AND ECONOMIC INTEGRATION
Pros and cons of monetary integration
Monetary integration refers to the incidence of two or more countries adopting the same
or single currency without having any further integration (Hefeker, 2018). This is also known as
monetary union or currency union. According to Tsoukalis (2017), monetary integrations can
also lead to the existence of a fixed mutual rate of exchange for different currencies, which
would be controlled by a single central bank.
There are two necessary components of monetary integration. First is the exchange rate
union, in which a certain section of the exchange rates bear a fixed relationship with each other
while the rates vary with non-union currencies. Second is the scope of convertibility, which
refers to the non-existence of all types of the exchange rate controls irrespective of the capital or
current transactions within the exchange rate zone (Kruse, 2014). The most prominent example
of monetary integration is the creation of EMU and Euro zone, where many independent nations
of Europe have adopted a single currency Euro.
The pros of monetary integration are:
 It reduces the transaction cost incurred by the traders and the travelers. Conversion of
currencies leads to some amount of losses in terms of real value of the currencies
(Hefeker, 2018).
 It helps in reducing the interest rates in the participating countries, and that attracts
more investment. Lower transaction costs help in bringing more cross border
investments.

2MONETARY AND ECONOMIC INTEGRATION
 Monetary integration brings exchange rate stability and thereby reducing differences in
the price across the region. Price comparison becomes more efficient and steps can be
taken accordingly to reduce disparities (Nieboer, 2014).
 It leads to free movement of labor by ensuring a free mobility area. Common currency
helps the workers to move between the countries without any regulation, which helps in
reducing the unemployment.
 Countries get access to larger markets and thus get the scope for increasing income.
The cons are:
 The countries lose monetary independence as they cannot take independent decision on
monetary policies even during any crisis.
 Costs of adopting a new currency are huge, especially for a less developed country.
 There are negative effects of cross border fiscal policies. When the neighboring
countries impose strict fiscal policies of reducing expenditure and investment, it affects
the other country due to common currency (Masciandaro & Romelli, 2017).
Pros and cons of economic integration
Economic integration is the process of elimination of reduction of the trade barriers
among the economically independent nations (Moon, 2017). This type of integration aims to
reduce or eliminate the barriers regarding the flow of trade in goods and services, labor and
capital. It also establishes certain factors of coordination and cooperation among the participating
countries. Economic integration is a dynamic procedure, which encourages the member countries
to become one entity over time (Baier, Bergstrand & Feng, 2014).
Pros of economic integration:

3MONETARY AND ECONOMIC INTEGRATION
 Facilitation of international trade by encouraging competition, comparative
advantages, capital liberalization, macroeconomic stability
 Market liberalization through introduction of common market and common currency
(Sannwald & Stohler, 2015)
 Political liberalism through democracy and political stability
 Short term growth due to increased competition, optimum and efficient allocation of
resources and higher real income
 Long term growth due to higher capital, increasing economies of scale, technological
progress
The cons are:
 Trade Blocs are often created, leading to increased trade barriers against non-member
countries
 Trade diversion occurs where trade is diverted from a cost-efficient non-member
country to cost-inefficient member country
 Countries lose sovereign power to a certain degree in issues like monetary, fiscal
policies and trade. Higher the degree of economic integration, greater is the degree of
economic control that needs to be given up to attain a stability in the political and
economic system (Baier, Bergstrand & Feng, 2014).
Effect and stages in monetary integration leading to economic integration
Monetary integration is one of the six stages of economic integration. Monetary union
occurs through three stages, as in the case of EMU. In the first stage, creation of a single market
is the agenda of the economic authorities. A single market ensures liberalization of capital

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movements across the member countries and prohibition of monetary financing of the public
authorities by the central banks (Masciandaro & Romelli, 2017). In the stage two, efforts are
taken to achieve the convergence among the member economies in terms of public finances,
exchange rates, inflation and long run rate of interests. Stage three is the final step, which
introduces the common currency, that is, monetary union gets completed in stage three. In the
case of EMU, 19 countries of Europe adopted Euro as their single currency with effect from
January 1, 1999 (Sannwald & Stohler, 2015).
Figure 1: Six stages of economic integration
(Source: Schad, 2011)
There are six stages in economic integration, namely, preferential trading area, free trade
area, custom union, common market, economic union and political union (Schad, 2011).
Monetary integration is a part of the bigger economic integration as it results in common market
and economic union for the member countries. The effect of the three stages of monetary union

5MONETARY AND ECONOMIC INTEGRATION
is wide spread. Firstly, the establishment of a single market is hugely beneficial for the member
countries, as that ensures reduction in trade barriers and increase in trade for the member
countries. This boosts the production and trade of the countries leading to economic growth. The
convergence of the policies regarding the exchange rate, inflation, public finances and long run
interest rates leads to political stability of the country (Tomann, 2017).
Application of monetary integration on a global scale
The degree of economic integration depends heavily on the degree of monetary
integration. There are many free trade areas and preferential trade areas in the world with certain
terms and conditions, beneficial for the member countries, but they do not necessarily have the
single currency or a fixed exchange rate among them. Lane (2006) highlights that the monetary
integration results in increased amount of cross border trade in goods and services, finance and
resources, increased comparative efficiency and advantage of the member countries, and helps to
achieve economic as well as political stability across the region, which are the major components
of economic integration. On a global scale, the biggest example of monetary integration is the
establishment of EMU of Europe. It was established on 1991 with the introduction of single
market, fixed exchange rate and Euro, the single currency of 19 countries of Europe. This has
benefitted the economic integration of European Union in terms of economic and political
stability, increased production and trade, increased employment and overall economic growth.

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References
Baier, S. L., Bergstrand, J. H., & Feng, M. (2014). Economic integration agreements and the
margins of international trade. Journal of International Economics, 93(2), 339-350.
Hefeker, C. (2018). Interest groups and monetary integration: The political economy of
exchange regime choice. Routledge.
Kruse, D. C. (2014). Monetary integration in Western Europe: EMU, EMS and beyond.
Butterworth-Heinemann.
Lane, P. (2006). The Real Effects of European Monetary Union. Journal Of Economic
Perspectives, 20(4), 47-66. http://dx.doi.org/10.1257/jep.20.4.47
Masciandaro, D., & Romelli, D. (2017). Optimal Currency Area and European Monetary
Membership: Economics and Political Economy.
Moon, W. (2017). Regional Integration–Europe and Asia Compared. Taylor & Francis.
Nieboer, J. (2014). The Pros and Cons of Economic and Monetary Union. [online]
Brugesgroup.com. Available at: https://www.brugesgroup.com/euro-and-economy/49-
issues/euro-and-economy/465-the-pros-and-cons-of-economic-and-monetary-union
[Accessed 23 Mar. 2018].
Sannwald, R., & Stohler, J. (2015). Economic integration. Princeton University Press.
Schad, M. (2011). Economic and Monetary Integration. [online] Uni-ulm.de. Available at:
https://www.uni-ulm.de/fileadmin/website_uni_ulm/mawi.inst.150/lehre/ss11/isp/
Economic_and_Monetary_Integration.pdf [Accessed 23 Mar. 2018].

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Tomann, H. (2017). Monetary Integration in Europe: The European Monetary Union after the
Financial Crisis. Springer.
Tsoukalis, L. (2017). The politics and economics of European monetary integration. Routledge.