ABSTRACT
The push for European Monetary Union (EMU) has been motivated as much, if not more, by political as by economic considerations. This chapter reviews the basic economics of the operation of the European Monetary System (EMS) and the case for EMU. It argues that while economic theory doesn't provide a clear cut answer about the economic desirability of EMU, it does provide powerful insights about necessary conditions for effective operation of the EMS and a smooth transition to EMU. The chapter deals with a plea for more attention by officials to a careful analysis of the prospective economic and political costs and benefits of EMU. While the initial motivation for the EMS was based primarily on concerns that exchange rate volatility was having disruptive effects, increasing concern with the control of inflation created substantial additional support for the EMS as a source of anti-inflationary discipline.
