The known unknowns and unknown unknowns of European Monetary Union

The early literature on Economic and Monetary Union (EMU) in Europe provided insights into the difficulties involved in forming a monetary union among diverse economies. Several of the problems that emerged in the euro crisis were correctly diagnosed beforehand. The fact that they were not addressed is not attributable to the shortcomings of research but to a complacent reading of the literature by the policy community. The possibility of balance-of-payments crises within monetary union and the degree of correlation between the default risks of banks and sovereigns were however underestimated or even ignored in the literature. An analytical reassessment of EMU helps define options for policy reform.