ABSTRACT
European Community (EC) countries found their interest rates rising with German rates, but largely without the increase in demand that Germany had; indeed, despite some spillover, Germany was fairly careful to "buy German." Eastern Europe caused the crisis. The possibility of Eastern Europe causing just this type of crisis was foreseen; Richard Portes discusses analyses that foresaw the problem. This chapter discusses the events in Eastern Europe and the Soviet Union in 1989 and their implications for European Monetary Union. The costs of monetary union include the potential of many EC members having to accomplish through deflation adjustments that could more easily be made by changing parities. The majority of EC members have weak governments, though Italy's is the most seriously damaged. Even as the Treaty was being cast in final form in December, 1991, in Maastricht, the EC members showed substantial disagreement on what to do about the break up of Yugoslavia and the ensuing violence.
