ABSTRACT
On January 1, 1994, Stage Two of the process towards the complete monetary unification of the European Union (EU) formally came into effect. However, it no longer seems as likely as it did at the time of the signing of the Maastricht Treaty that the EU will, in fact, implement the third and final stage of this process in 1997 or, at the latest, on January 1, 1999, as prescribed by the Treaty. Doubts exist as to whether the European Monetary System (EMS) can provide the policy anchor for the EU member countries during the transition period. Persistent speculative pressures from the summer of 1992 to the end of July 1993 forced Italy and Britain to drop out of the system’s exchange rate mechanism (ERM) in September 1992, a series of realignments in intra-EMS exchange rates and, finally, on August 1, 1993, the decision to alter the mechanism’s rules for intervention in the foreign exchange markets by widening the permissible band of fluctuation from ±2.25% to ±15% on either side of the agreed central parities. The 1992-93 turmoil has raised doubts not only about the capacity of the EMS to fend off speculative pressures, even when parities are not inconsistent with market fundamentals, but also regarding the political commitment of EU member countries to the objective of economic and monetary union (EMU).
