Costs of Diversity in the EMU: An Analysis of some Aspects and Impacts

Stefan Urech

Student thesis: Master thesis


This thesis provides an overview of the diversity-challenge the European Economic and Monetary Union (EMU) faces, as it illuminates how major sources of diversity create costs in the EMU. Thereby, the thesis consults different strands of literature and gathers the gained insights around the focal point of costly impacts of diversity in the EMU. Specifically, the thesis does the following: - It summarises the European integration history in order to provide an overview of what the EMU is. Thereby, it is shown that the EMU wanted to prevent macroeconomic imbalances from its outset, but, as at the latest the current debt crisis has revealed, has failed in this undertaking so far. It is described that the EU and the EMU reacted to the disastrous situation and launched the Macroeconomic Imbalance Procedure (MIP), as a new and more comprehensive attempt to govern its members’ economic policy effectively. While the MIP’s set-up is promising, its enforcement remains the awkward part. - It reviews the Optimum Currency Area (OCA) literature, which examines the feasibility of a single currency. Thereby, diversity makes itself felt through asymmetric economic developments which need to be handled. The literature review is supplemented with current data allowing a judgement of the EMU and the EU’s current performance on major OCA criteria. This overview depicts a mixed picture. While EU economies have developed quite symmetrically, on average, redistributive forces as well as the adjustment allowing labour market are not sufficiently developed. - It reveals that the analysis of diversity in the EMU often focuses on economics only, unjustifiably neglecting social and political factors. The thesis then tables population diversity as another important facet of diversity shaping the EMU and develops an analytical approach to test and discuss its impacts on the EMU. Thereby, it merges two widely accepted points into one hypothesis. Specifically, the statement that the EMU requires popular support in order to survive and prosper is combined with the diversity-means-cost-paradigm, known from the economic analysis of the EMU. The resulting hypothesis that population diversity impedes the formation of a cohesive and supportive population is tested and elaborated in turn. Thereby, population diversity is separated and discussed along the two wellestablished strands of literature on economic inequality and ethnic heterogeneity. The analysis results in two main findings. First, ethnic diversity has an inherent risk to impact a society negatively, but it can be addressed and controlled with a mindset based on multiculturalism. One important step towards such a mindset in Europe is the creation of a shared European identity, which is necessarily based on a multinational understanding. Second, economic inequality matters. Consequently, the creation of equal opportunities for everybody should be on every politician’s agenda. With its regional policy the EU has chosen the right direction, but it needs more resources to pursue the chosen way with the necessary conviction. Finding the appropriate way to mange population diversity in Europe is concluded to be a crucial future task of the EU, the EMU and of the academics.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2012
Number of pages107