Mark Carney: The economics of currency unions
Speech by Mr Mark Carney, Governor of the Bank of England, at a lunch hosted by the
Scottish Council for Development & Industry, Edinburgh, 29 January 2014.
* * *
It is a pleasure to be in Scotland today and to have the opportunity to hear directly from
businesses about the economy. The recovery that began in Scotland has now taken hold in the
UK with the economy growing at its fastest rate since 2007.
Although a few quarters of above-trend growth driven by household spending represent a good
start, they aren't sufficient. Even though employment is growing and unemployment has fallen
- particularly so recently in Scotland - the recovery has some way to run before it would be
appropriate to consider moving away from the emergency setting of monetary policy. The
Monetary Policy Committee has noted that, when the time eventually comes to increase
interest rates, any such move would be gradual. That should help to reassure businesses in
Scotland and all around the UK that the path of interest rates will be consistent with achieving a
sustained and balanced recovery in the face of the remaining headwinds stemming from the
financial crisis.
Scotland is a land rich in history and ideas, and one to which I owe a great debt. Scots built the
very foundations of my native land, Canada, whose first Prime Minister Sir John A. Macdonald
was born in Glasgow. Scots have shaped the modern world through their contributions to
culture and science. The pioneering work of Scottish economists from Adam Smith to
Sir James Mirrlees has had great influence on my profession. Among them is David Hume,
born just a short walk from here and a great friend and collaborator of Smith. While better
known as a philosopher, Hume's essay "Of the balance of trade" set out the theory of how
trade imbalances between nations sharing a currency (gold) would self-correct as inflows of
money to surplus countries raised their prices and reduced their competitiveness.
As an empiricist, Hume would doubtless admit that recent euro area experience of persistent
current account deficits leading not to self-correction but instead to crisis requires a more
elaborate explanation. Fortunately economists have over the years obliged with substantial
work on the economics of currency unions.
Given the recent focus here on the currency and the fundamental role of the Bank of England
in maintaining monetary and financial stability across the United Kingdom, I want to draw on
that body of economics today to review some of the most important issues with respect to
monetary union.
I will stick rigidly to what Thomas Carlyle described as the dismal science. Any arrangement to
retain sterling in an independent Scotland would need to be negotiated between the
Westminster and Scottish Parliaments. The Bank of England would implement whatever
monetary arrangements were put in place.
What follows is not an assessment of whether Scotland will be overall better or worse off under
independence - that is a multi-faceted judgement for the Scottish people. It does not pass
judgement on the relative merits of the different currency options for an independent Scotland,
but instead draws attention to the key issues. This is a technocratic assessment of what makes
an effective currency union between independent nations.
The costs and benefits of currency areas
Let me begin by outlining the basic rationale for sharing a currency.
Economist Robert Mundell first wrote about what determined an "optimum currency area"1
Spurred by the breakdown of the Bretton Woods system and the move to floating exchange
rates as well as by the formation of the European Monetary Union, others have elaborated and
extended his work. We now have a fairly comprehensive sense of the costs and benefits of
sharing a currency.
For Mundell, the main benefit was that it eliminates the transactions costs associated with
using, and switching between, different currencies. The European Commission estimated the
size of these direct benefits for Europe to be almost 0.5% of GDP every year.2
Sharing a currency can promote investment by reducing uncertainty about currency
movements and giving businesses access to deeper, more liquid financial markets.3 It can also
reduce borrowing costs for countries with a history of high inflation and currency devaluation.
By tying themselves to the mast of the monetary policy of others they can import credibility.
This is exactly what the UK and other European countries aimed to do in joining the Exchange
Rate Mechanism.
Sharing a currency also helps promote integration. It does so by eliminating one of the barriers
between markets, improving transparency of pricing and increasing competition. Sharing a
currency can also help to increase the mobility of labour and capital, raise trade in goods and
services, and improve the flow of technology and ideas.4 In these ways, members of a
currency union can exploit more fully comparative advantage and ensure greater dynamic
efficiency.
Set against these benefits are the potentially large costs of giving up an independent monetary
policy tailored to the needs of the region and a flexible exchange rate that can help absorb
shocks.
A flexible exchange rate acts as a valuable shock absorber when domestic wages and prices
are sticky.5 For example, suppose demand for a country's exports falls. All else equal, its
output will fall, unemployment increase and current account deteriorate. With an independent
currency, exchange rate depreciation can dampen these effects by improving competitiveness,
and monetary policy can become more accommodative, supporting demand and employment.
However, if the country were part of a currency area with its foreign market, its exchange rate
would by definition not change, putting the full weight of adjustment on wages and
unemployment - a significantly more protracted and painful process. In addition, the
responsiveness of monetary policy to weak demand in that country would be diluted by the
needs of the broader membership.
Being in a currency union can amplify fiscal stress, and increase both the risks and
consequences of financial instability. In the situation just described, fiscal policy would ideally
help smooth adjustment to the external shock. But its ability to do so could be limited by the
budgetary impact of the falls in output, prices and wages. To maintain credibility, fiscal policy
1
Mundell (1961).
2
Commission of the European Communities (1990).
3
The elimination of currency risk within the area reduces uncertainty over future prices for firms and consumers,
helping them to make better decisions about how much to produce, invest and consume. These benefits are
hard to quantify, but probably important. It also avoids inefficiencies that can arise when the exchange rate
fluctuates for non-fundamental reasons (Mundell 1973, Buiter 2000).
4
A substantial literature has sought to measure the impact of currency unions on trade flows, starting with Rose's
(2000) surprising estimate that they are associated with a tripling in trade flows. Subsequent work suggests
smaller impacts. In relation to the Eurozone, a survey by Rose (2009) concludes that "EMU has raised trade
inside the Eurozone by at least 8% and perhaps 23%". De Grauwe and Mongelli (2005) survey the broader ways
in which currency unions promote integration.
5
If wages and prices can adjust instantaneously then the adjustment to shocks can happen costlessly via
movements in prices and wages, so there is no cost to losing exchange rate flexibility.
may even become pro-cyclical, with the resulting austerity exacerbating the initial fall in
demand. In the extreme, adverse fiscal dynamics could call into question a country's
membership of the union, creating the possibility of self-fulfilling "runs" on bank and sovereign
debt absent central bank support.6 Such adverse feedback loops turned recessions into
depressions in several European countries in recent years.
What makes a successful currency union?
The success of a currency area hinges on whether its features mitigate the costs of losing the
flexibility that comes from an independent monetary policy. These features generally promote
the alignment of economic cycles, and the maintenance of price and financial stability within
the union.
The most obvious feature is the degree of similarity amongst members. Similar economies
won't suffer from a "one size fits all" monetary policy.7 Surprisingly, a review of major currency
areas suggests that similarity is neither necessary nor sufficient for success. For example, the
industrial structures of the core and periphery of the euro area are more similar than those of
the constituents of Canada or the US (table 1). Yet few would argue that the euro area is the
most effective currency union of the three. Conversely, the Canadian monetary union works
well despite having substantially larger industrial variation than even the US.8
The similarity of the industrial structure of Scotland and the rest of the UK depends on how
offshore oil is allocated. With oil split on a per capita basis Scotland and the rest of the UK look
about as similar as the core and periphery of the euro area; but with oil split on a geographic
basis they look about as diverse as the United States (table 1). Despite any differences, the
close integration of the Scottish and rest of UK economies has helped ensure that their
economic performance has been very similar over a long period - output growth is highly
correlated (chart 1).9
So theory notwithstanding, being similar doesn't necessarily help and being different doesn't
necessarily hinder. This suggests we should look elsewhere for the ingredients of a successful
union: to the mobility of labour, capital and goods; to institutional structures promoting financial
stability; and to institutions that mutualise risks and pool fiscal resources.
An economic union with free movement of labour, capital and goods
The "five tests" formulated by the UK Government to analyse the merits of joining the euro in
2003 were crafted in large part around the degree of integration of the UK and the euro area.10
That is because greater openness and integration within a currency union not only enhances
6
These dynamics were in operation in the recent euro area crisis, until the announcement of the ECB's Outright
Monetary Transactions.
7
Members are similar when they experience similar shocks and respond to the same shock in similar ways. That
reduces the likelihood of a shock affecting one part of the currency union, and hence reduces the need for the
exchange rate to adjust. Kenen (1969) argued that more diversified economies were better candidates to join
currency unions because industry-specific shocks were less likely to have macroeconomic effects, reducing the
need for exchange rate adjustment.
8
See Carney (2013).
9
Moreover unit labour costs in Scotland and the UK as a whole have moved closely together (chart 2), whereas
large relative movements in the Eurozone imply divergences in competitiveness (chart 3).
10
The five tests focused on the degree of convergence between the UK and the rest of Europe, the degree of
flexibility to adjust without moves in the exchange rate, and on whether joining would promote investment,
financial services, and growth, stability and employment (HM Treasury 2003).
the benefits of a shared currency but can also mitigate the cost of losing exchange rate
flexibility.11
Mundell originally argued that currency areas should coincide with regions which had high
internal factor mobility.12 The idea was that by moving from areas where demand has fallen to
those where it has risen, workers help moderate changes in wages and unemployment.13
There are clear practical impediments to labour mobility within the euro area including
language and culture. As a consequence, it has the lowest cross-border mobility of the five
currency unions in table 2.14 This has contributed to the need for painful internal devaluation for
some countries in the euro area to restore competitiveness.
Given that more than 700,000 Scots live in the rest of the United Kingdom and over 500,000
from the rest of the UK live in Scotland, one would be tempted to assume that labour mobility
between the two is high.15 In fact gross migration flows between Scotland and the rest of the
UK are lower than in the constituent parts of some other currency areas (table 2).
That probably in part reflects the fact that economic conditions in Scotland and the rest of the
UK have been very similar, such that the incentive for migration is relatively limited. It is
reasonable to think that the similarities between Scotland and the rest of the UK mean that
there is the potential for higher labour mobility should that become necessary. Given
differences in industrial structure, this would put a premium on ensuring barriers to mobility are
not allowed to develop if monetary arrangements were to change.
It is not just an integrated labour market that helps adjustment within a currency union.
Openness to trade and free movement of goods also assists in diluting the effect of shocks by
spreading them across the union. If one part of the union imports a large share of what it
consumes from other parts, changes in demand will be quickly transmitted. This helps to align
16, 17
economic cycles and makes a common monetary policy more appropriate.
11
The classic early contribution on this point was made by McKinnon (1963), who argued that the more open the
economy, the more flexible would be domestic prices and wages so that movements in the exchange rate would
have little impact on competitiveness, and would be less effective as a stabiliser. In that case moving to a fixed
exchange rate would be less costly.
12
Mundell (1961).
13
Some, including Bean (1992), have expressed scepticism that factors of production could in fact move over a
shorter timescale than that over which prices and wages adjust.
14
This is consistent with evidence that labour moves less in Europe in response to regional shocks than is the
case in the US - see Blanchard and Katz (1992) for the US, and Decressin and Fatas (1995) who apply the
same methodology to Europe. The latter find that participation reacts by more to a labour demand shock, and
migration by less in Europe than the US.
15
Office for National Statistics, 2011 Census.
16
Frankel and Rose (1998) found that countries with closer trade links tend to have more tightly correlated
business cycles. Since joining a currency area promotes trade integration, it also is also likely to help align
international business cycles. That means one of the key optimum currency area criteria is endogenous to the
decision to join. Rose's (2009) more recent meta-analysis also finds a significant effect of trade on the
synchronisation of business cycles.
De Grauwe (2000) provides a discussion of how closer integration may affect the likelihood that countries
experience asymmetric shocks. On the one hand closer trade links could result in greater specialisation, leaving
currency union members more prone to asymmetric shocks. On the other, it could result in more intra-industry
trade, increasing the likelihood that countries will experience similar shocks, and thereby helping to align
business cycles.
17
A high degree of openness also means that the adjustment required to boost net exports is somewhat lower. A
much weaker adjustment in prices and wages is necessary to raise net exports by a given share of GDP if both
exports and imports are a large share of GDP than if they are a small share, Krugman (1992). However Adrian
and Gros (2004) observe that open economies are correspondingly more vulnerable to external shocks.
Scotland and the rest of the UK are highly integrated. 70% of Scottish exports are destined for,
and 74% of imports into Scotland come from, the rest of the UK (table 3). A word of caution
applies here. There is a body of evidence that national borders can influence trade flows, even
between otherwise highly integrated economies.18 The high degree of integration between
Scotland and the rest of the UK may in part depend on their being part of the same sovereign
nation.
Mobility of capital can also promote necessary adjustment to shocks. Moreover, if capital in
one part of a union is owned by those in other parts, the effect of a given shock is diluted
across the union. Simply put, risks and rewards are shared. Similarly, the ability to borrow from
other parts of the currency union in deep and liquid cross-union credit markets or integrated
banking systems allows one part of a union to smooth out temporary falls in incomes.19
However, free movement of capital can be a mixed blessing. If the funds provided by one part
of a union to another can be withdrawn easily, these outflows can - if the right structures are
not in place - undermine financial and economic stability of all members.
This brings me to the second feature of a successful currency union - banking union.
Banking union
Effective currency unions need a wide range of institutions to support an integrated and
efficient financial sector. These are often referred to as a "banking union" and include:
• Common supervisory standards,
• Access to central bank liquidity and lender of last resort facilities,
• Common resolution mechanisms, and
• A credible deposit guarantee scheme.
Without a banking union, cross-border capital flows can be restricted, the effectiveness of
monetary policy impaired and, in the extreme, the viability of the union itself undermined.
It is as difficult to separate the institutions that support banking union from national fiscal
arrangements as it is to separate the creditworthiness of banks and sovereigns. Let me
explain.
In recent years, doubts about the resilience of major financial institutions have created
expectations of sovereign support. The scale of these potential liabilities can in turn generate
doubts about public finances undermining the resilience of both banks and sovereigns.
When such concerns emerge, the consequences can be dramatic. The banking systems of
peripheral European countries experienced outflows of between 10% and 85% of total deposits
from elsewhere in the euro area in the three years following June 2010 (chart 4). Bank funding
spreads in those countries ballooned by 5 percentage points from the beginning of 2010 to the
middle of 2012 (chart 5). Bank lending to the real economy collapsed and credit conditions
21
tightened massively (see charts 6-7).20,
Clearly something must be done.
It is in the interests of all countries to sever the link between banks and sovereigns by ending
too big to fail. Governments must put in place regimes that impose losses on bank
management, shareholders and creditors rather than taxpayers. That is exactly what is
established by the UK's recent Banking Reform Act, and the recently agreed European Bank
Resolution and Recovery Directive. The Bank of England is at the forefront of efforts to
establish the common global requirement that is needed to finish the job.
While ending too big to fail should mean that taxpayers no longer have to bail out banks, it will
not fully break the bank-sovereign loop, for three reasons.
First, banks hold substantial amounts of their national government's debt in order to manage
liquidity, meet collateral obligations and hedge exposures - European banks hold more than
€1trn of home country sovereign debt amounting to 5% of total assets.
Second, confidence in deposit guarantee schemes relies on a national backstop.22 The
European process illustrates the difficulty of building the institutional arrangements for a
common insurance scheme across sovereign states. This is unsurprising since mutualised
deposit guarantee schemes imply a pooling of risk and loss of sovereignty. All member states
must be persuaded that they won't simply be left with the bill for the mistakes of others.
Third, a currency union requires a common fiscal backstop for its central bank. Central banks
must be able to act as Lender of Last Resort, both to financial institutions that are solvent but
experiencing an unwarranted loss of confidence and to provide bridging finance to institutions
that are being recapitalised using new resolution regimes. Under the current governance
arrangements in the UK, these operations require an indemnity from, and the approval of, the
Chancellor, because they would put substantial public funds at risk.
The existing banking union between Scotland and the rest of the United Kingdom has proved
durable and efficient. Its foundations include a single prudential supervisor maintaining
consistent standards of resilience, a single deposit guarantee scheme backed by the central
government, and a common central bank, able to act as Lender of Last Resort across the
union, and also backed by the central government. These arrangements help ensure that
Scotland can sustain a banking system whose collective balance sheet is substantially larger
than its GDP.
The euro area has shown the dangers of not having such arrangements, as well as the
difficulties of the necessary pooling of sovereignty to build them. An independent Scotland
would need to consider carefully how to develop arrangements with the continuing United
Kingdom that are both consistent with its sovereignty and sufficient to maintain financial
stability.
Fiscal arrangements
While banking union requires common fiscal backing, there are two broader justifications for
shared fiscal arrangements within a currency area.
The first is that deeper fiscal integration between members can play an important role in
smoothing shocks that affect only part of the currency area.23
It is no coincidence that effective currency unions tend to have centralised fiscal authorities
whose spending is a sizeable share of GDP - averaging over a quarter of GDP for advanced
countries outside the euro area (table 5). That offers scope for a significant degree of
stabilisation, much of it happening automatically as slowing growth in one part of the union
causes tax revenues there to fall and welfare spending to increase. Those automatic fiscal
stabilisers are important within the UK - it is estimated that for every £1 that output falls the
reduction in taxes and increases in transfers are together worth about 50 pence.24
What matters for individuals is the extent to which this risk sharing insulates their disposable
income from shocks. In the UK there is evidence that around a fifth of variation in regional
personal income relative to the national average is stabilised by central government transfers.
That is probably an important factor in accounting for the close harmonisation of economic
performance within the UK. The degree of stabilisation in France and the US is similar, with a
slightly lower figure for Canada.25
Fiscal stabilisation is particularly important in a currency union because it helps mitigate the
loss of exchange rate flexibility. But being in a currency union can amplify fiscal stress for
individual nations, limiting their ability to perform this valuable role just when it is most needed.
So it makes sense to share fiscal risks across the whole currency area. A localised shock is
less likely to stretch the fiscal position in a larger more diversified currency area, especially if it
shifts demand between different parts of the area. That makes a given shock to Nova Scotia
less severe than the equivalent to Portugal.
The second justification for shared fiscal arrangements is that problems in one country are very
likely to spill over to others. For example, the threat of default by one country may trigger a
generalised crisis, particularly if the liabilities of the crisis country are held by the banking
system of the broader currency area. It will be in the interests of other countries in the union to
bail out a country in crisis, and that reduces the incentives for countries to run their finances
prudently in the first place. At a minimum, this "moral hazard" problem suggests the need for
tight fiscal rules, to enforce prudent behaviour for all in the union, although credible sanctions
for breaking those rules are hard to develop.26
There is an obvious tension between using robust fiscal rules to solve this problem, and
allowing national fiscal policy to act as a shock absorber. This reinforces the need for fiscal risk
sharing between nations.
As the Presidents of the European Council, European Commission, Eurogroup and European
Central Bank argued in their report, European monetary union, which has so far relied on fiscal
rules, will not be complete until it builds mechanisms to share fiscal sovereignty.27 Possible
options range from a transfer union to a pooled employment insurance mechanism. Whatever
is ultimately chosen, the degree of fiscal risk sharing will likely have to be significant.
Similarly, in a monetary union between an independent Scotland and the rest of the UK the two
Parliaments would have to agree on whether fiscal rules were sufficient or whether similar
risksharing mechanisms were necessary.
Conclusion
The Scottish government has stated that in the event of independence it would seek to retain
sterling as part of a formal currency union. All aspects of any such arrangement would be a
matter for the Scottish and UK Parliaments. If such deliberations ever were to happen, they
would need to consider carefully what the economics of currency unions suggest are the
necessary foundations for a durable union, particularly given the clear risks if these foundations
are not in place.
Those risks have been demonstrated clearly in the euro area over recent years, with sovereign
debt crises, financial fragmentation and large divergences in economic performance. The euro
area is now beginning to rectify its institutional shortcomings, but further, very significant steps
must be taken to expand the sharing of risks and pooling of fiscal resources. In short, a
durable, successful currency union requires some ceding of national sovereignty.
It is likely that similar institutional arrangements would be necessary to support a monetary
union between an independent Scotland and the rest of the UK.
I suspect you have reached your limits of endurance of the dismal science, so you'll be relieved
to know that economics can take us no further. Decisions that cede sovereignty and limit
autonomy are rightly choices for elected governments and involve considerations beyond mere
economics. For those considerations, others are better placed to comment.
References
Adrian, T., and D. Gros (2004), "The degree of openness and the cost of fixing exchange rate",
Economics Letters, Vol. 83, Issue 1, Apr, pp 141-146.
Asdrubali, P., B. Sorensen and O. Yosha (1996), "Channels of Interstate Risk Sharing: United
States 1963-1990", Quarterly Journal of Economics, CXI, Nov: pp 1081-1110.
Barroso, J., M. Draghi, J-C. Juncker and H. Van Rompuy (2012), "Towards a genuine
economic and monetary union", available at
http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/134069.pdf.
Bean, C. (1992), "Economic and Monetary Union in Europe", The Journal of Economic
Perspectives, Vol. 6, No. 4 (Autumn), pp 31-52.
Beetsma, R. and H. Uhlig (1999), "An Analysis of the Stability and Growth Pact", The
Economic Journal, Vol. 109, No. 458 (Oct.), pp 546-571.
Blanchard, O. and L. Katz (1992), "Regional Evolutions", Brookings Papers on Economic
Activity, 1: 1-77.
Buiter, W. (2000), "Optimal currency areas: why does the exchange rate regime matter? (with
an application to UK membership in EMU)". CEP Discussion Paper 462.
Carney, M. (2013), "Canada Works", remarks at Board of Trade of Metropolitan Montreal,
available at http://www.bankofcanada.ca/wp-content/uploads/2013/05/remarks-210513.pdf.
Chamberlin, G., Dhami, P., Farrington, S., Helgadottir, T. and Robins, J. (2012), "Cyclically
adjusting the public finances", Office for Budget Responsibility Working Paper No. 3,
http://budgetresponsibility.org.uk/pubs/Working-paper-No3.pdf.
Chari, V., and P. Kehoe (2007), "On the need for fiscal constraints in a monetary union",
Journal of Monetary Economics, Vol. 54, Issue 8, Nov. 2007, pp. 2399-2408
Commission of the European Communities (1990), "One market, one money: an evaluation of
the potential benefits and costs of forming an economic and monetary union", European
Economy, No. 44, Oct.
Crucini, M. (1999), "On International and National Dimensions of Risk Sharing", Review of
Economics and Statistics, LXXXI, 1, Feb., pp. 73-84.
Decressin, J. and A. Fatas (1995), "Regional Labour Market Dynamics in Europe", European
Economic Review, Vol. 39: pp. 1627-1655
De Grauwe, P. (2000), "The Economics of Monetary Union", 4th ed., Oxford University Press,
Oxford.
De Grauwe, P. and F. Mongelli (2005), "Endogeneities of Optimum Currency Areas: What
Brings Countries Sharing a Single Currency Closer Together?", ECB Working Paper No.468,
Apr.
Delors Committee: Committee for the Study of Economic and Monetary Union (1989), "Report
on Economic and Monetary Union in the European Community", Luxembourg: Office for
Official Publications of the European Communities.
Frankel, J. (2008), "The Estimated Effects of the Euro on Trade: Why Are They Below
Historical Effects of Monetary Unions Among Smaller Countries?", NBER working paper
14542.
Frankel, J. and Rose, A. (1998), "The Endogeneity of Optimum Currency Areas Criteria", The
Economic Journal, Vol. 108, Jul, pp. 1009-1025.
Frankel, J. and Rose, A. (2002), "An Estimate of the Effect of Common Currencies on Trade
and Income", Quarterly Journal of Economics, 117, pp. 437-466.
HM Treasury (2003), "UK membership of the single currency - an assessment of the five
economic tests", CM 5776, London, HMSO, Jun.
Kenen, P (1969), "The Theory of Optimum Currency Areas: An Eclectic View," in Robert
Mundell and Alexander Swoboda (eds), Monetary Problems of the International Economy,
Chicago: University of Chicago Press, pp.41-60.
Krugman, Paul R. (1992) "Policy Problems of a Monetary Union", pp. 185 - 203 in Krugman,
Paul R. (1992) Currencies and Crises (Cambridge Ma, and London: MIT Press).
Melitz, J. and Zumer, F. (2002). "Regional Redistribution and Stabilization by the Center in
Canada, France, the UK and the US: A Reassessment and New Tests". Journal of Public
Economic, 86, pp. 263-286.
McCallum, J. (1995), "National borders matter: Canada-US regional trade patterns", The
American Economic Review, 85 (3), 615-623.
McKinnon, R., (1963), "Optimum currency areas", American Economic Review, Vol. 53, Sep,
pp. 717-25.
McKinnon, R., (2004), "Optimum Currency Areas and Key Currencies: Mundell I vs. Mundell II",
Journal of Common Market Studies, Vol. 42. Number 4. pp. 689-715.
Mundell, R. (1961), "A theory of optimum currency areas", American Economic Review,
Vol. 51, Sep.
Mundell, R. (1973), "Uncommon Arguments for Common Currencies", in Johnson, H.G. and
Swoboda, A.K. (eds).
Persson, T. and G. Tabellini (1996), "Federal Fiscal Constitutions: Risk Sharing and Moral
Hazard", Econometrica 64(3): pp. 623-646.
Rose, A. (2000), "One money, one market: estimating the effect of common currencies on
trade", Economic Policy, Vol. 15, April, pp. 7-45.
Rose, A. and van Wincoop, E. (2001), "National money as a barrier to international trade: The
real case for currency union", American Economic Review 91(2), pp.386-390.
Rose, A., (2009), "Is EMU becoming an optimum currency area? The evidence on trade and
business cycle synchronization", mimeo.
TABLE AND CHART ANNEX(i)
Table 1: Similarity of industrial structures
rUK and
Scotland (oil on Canada (13
EA (Core vs EA (17 rUK and geographic provinces and US (50 states
VEAPs)(a) countries)(b) Scotland(c) basis)(d) territories) + DC)
Energy 0.1 1.0 1.8 10.0 11.5 3.1
Construction 0.6 1.3 0.1 0.7 1.3 0.6
Manufacturing 1.3 6.1 0.7 0.5 4.8 4.5
Finance and 0.3 2.5 0.8 1.4 2.2 3.2
insurance
Other 0.3 5.6 1.5 7.4 8.5 5.2
Sum 2.6 16.4 4.7 20.1 28.3 16.6
Sources: Bank calculations; Statistics Canada; US Bureau of Economic Analysis; Eurostat; ONS Regional Gross Value
Added. rUK and Scotland data are for 2011; Euro Area (EA), US and Canada data are for 2012. Industrial
classifications in the US and Canada are NAICS, in the UK SIC, and in the Euro Area they are NACE Rev2. These were
consolidated into the five broader industrial classifications to ensure consistency.
Notes: The table shows absolute differences between output industry shares in each region and the monetary union as
a whole, which are then averaged for each industry in each monetary union. The sum of each column is the
Krugman Specialisation Index (multiplied by a factor of 100) and is