ABSTRACT
This chapter outlines the “credit mechanics” of monetary unions, and conducts a review of the Eurosystem on this basis. Three principle design options for a European monetary union are evaluated and compared with historical incidences of successful monetary unions, including the Scandinavian Monetary Union and the monetary union that existed between Australia, New Zealand and the United Kingdom. It is shown that, despite the no-bailout Treaty provisions and the retention of national central banks, the Eurosystem design is based on unlimited and unsecured inter-central bank credit. This represents one of the weaker design choices available. Reform options and their design features are discussed. It is argued that more fundamental reforms are needed (1) to return central banking practices to a narrow mandate and a focus on refinancing property at market interest rates and (2) to create better alignment between the monetary union design and the level of EU political and fiscal integration.
