The Euro - A Political Initiative or an Economic Necessity?

Lamfalussy, Alexandre

The road leading to the Euro started in the aftermath of the Second World War and gained impetus following the fall of the Berlin Wall. Political and economic considerations have underpinned the process.
Monetary union entails two main, immediate, advantages: it eliminates the exchange rate risk and therefore the costs of covering such risk; and it also eliminates transaction costs. One disadvantage is emotional: it relates to the loss of a key symbol of national sovereignty. But it also carries the very practical disadvantage of losing control over a major economic policy tool.
There is not the slightest doubt that in Hungary's case the advantages significantly outweigh the disadvantages. Its economy is relatively small, wide open and already deeply integrated into that of the European Union. In fact it has already lost its monetary sovereignty. Moreover, the country continues to suffer from a burdensome inflationary tradition which would be eliminated by handing over monetary policy decisions to the ECB, yet retaining a say in shaping these decisions. Admittedly, fulfilling the accession criteria may well entail short-term hardship; but with or without the acceptance of the Euro, the country cannot avoid the obligation to reduce an unsustainably large public sector deficit and a growing debt burden.

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