On the formation of the European Monetary Union

Abstract

The main objective of this study is to search, using both theoretical analysis and empirical evidence for the European case, for the strategy to be followed for the creation of a monetary union among a group of countries, and to derive the conditions which have to be fulfilled in order to make such a strategy viable. The theoretical foundations for the creation of a monetary union are set out. The European realities suggest gradualistic approaches. Theoretical analysis of the strategy of economic policy coordination takes place in terms of all of the above considerations. Analysis then follows on the extent to which this strategy, implemented in Europe since the early seventies, has been successful. Finally, in the light of this analysis and analysis of other proposals, a conclusion is reached on which should be the preferred strategy, and how it should be established successfully. The move towards exchange rate fixity has implications for members' objectives and policies. The European arrangements were inadequate and did not pay sufficient attention to important issues which remained unsolved. Economic discipline was not forced and members' objectives diverged considerably. Policies did not depict any coordination pattern. As a result the 1972 intra-European exchange rate arrangements failed. Other undesirable implications also followed. Policy coordination still seems to be the preferable approach provided that important changes take place, and measures to eventually develop centralisation are taken. The decision to create a European monetary system is judged in view of these conclusions. Major weaknesses remain and the system's ability to guarantee long-run stability is questioned. Important changes are necessary for the Community to embark on the path to a monetary union. Indications are not encouraging, while important obstacles to the changes remain.