ABSTRACT
The recent debate on EMU has highlighted a conflict of interest between core and non-core EU members: most non-core countries, in particular Italy and Spain, have shown a strong willingness to be part of EMU from the outset (1 January 1999). Core countries view this with some scepticism or with outright opposition (as occasional Bundesbank comments have shown). In the event that Italy and other peripheral countries were to remain out, an increasingly unlikely scenario, there would be considerable pressure to devise forms of associate participation, particularly as the ‘outs’ have made considerable efforts to be part of EMU and would not want such efforts to go completely unrewarded. ‘Links’ to EMU will also become interesting as the EU pursues a gradual enlargement towards the East. Here, we look at possible options. We concentrate on the idea of a currency board, the strictest form of currency pegging. This system contains several interesting properties, particularly the fact that it provides a strict, but unilateral and reversible, form of fixed exchange rates. We conclude, however, that the risk of financial instability is so high that the system cannot be considered a viable option. A weaker alternative form of bilateral currency pegging with some borrowing facilities and intervention obligation within wide bands seems the only possible solution. This is discussed below. ERM II would not differ much from its predecessor. The lack of intermediate regimes between monetary union and a loose ERM system constitutes a problem for EMU and explains non-core countries’ insistence on being part of the first wave.
