The first part of Mark Carney’s Edinburgh speech was a clear and helpful summary of the pros and cons of monetary union. In favour of monetary union, there are
- reduced transaction costs,
- lower borrowing costs,
- opportunities for investment and
- greater economic integration.
Against, there are
- the loss of the capacity to form an independent monetary policy,
- a reduced ability to use exchange rates to absorb shocks – the burden is liable to be on in prices and wages
- the possibility that the dominance of monetary policy will lead to ‘pro-cyclical’ economic policy – making slumps and recessions worse.
The second part was a review of the conditions for such a union, which he identifies as
- free movement of labour, capital and goods
- a banking union, and
- fiscal integration.
I was less convinced of his arguments here. The Crown Dependencies (the Channel Islands and the Isle of Man) are recognised as part of the sterling area without meeting any of those conditions. These conditions seem to be part of a negotiating position, rather than essential requirements.