What does the experience of German monetary union tell us about the theory of monetary union?

This paper summarizes the modern theory of monetary unions to identify in what circumstances such unions are supposed to impose low costs on, and give substantial benefits to, their members and then considers the case of the effect on Eastern Germany of German monetary and economic union. This union satisfied most of the conditions for low cost and high benefit, yet the initial impact of union was a severe fall in economic activity in Eastern Germany. The paper concludes that the conventional theory is deficient in ignoring the effects on the poorer member countries of a union of the expectations engendered by the creation of the union, and argues that an explicit regional policy is required in a union of members of widely different income levels.