ABSTRACT
The momentum towards monetary union is considerably greater now than in the first, unsuccessful attempt in the early 1970s. Growing convergence of inflation rates among the twelve European Community countries, the success of the European Monetary System in stabilizing exchange rates and the prospects of EC-92 all bode well for European monetary union. After being discussed for several years, monetary union is an important part, and, in fact, the raison d’etre, of the Treaty on European Union, agreed to in December 1991 at Maastricht, the Netherlands.
In economic and monetary union (EMU), as specified in the Treaty, the European Community (EC) countries would have an EC central bank, which would determine the EC’s common monetary policy, and a single currency no later than 1999. Price stability is clearly specified as the primary goal of EMU. Although fiscal policies would remain the province of member countries, reduction of fiscal deficits is required before EMU goes into effect. The EC Council would determine exchange rate policy for the single currency vis-a-vis non-EC currencies. The transition to EMU would occur in three stages during which the EC countries would 80strengthen their coordination of economic policies, and begin institutional changes necessary for an EC central bank.
For the EC, monetary union would probably stimulate economic growth. After a single currency becomes effective, savings in transactions costs (by not having to convert one EC currency into another) would make the EC economy more efficient. Reflecting a common position, the EC would have a larger voice in international monetary policy coordination. The major cost is that individual EC countries could no longer use changes in monetary policy or exchange rates to adjust to country-specific economic shocks.
For the United States, the international role of the dollar and U.S. influence in international policy coordination would likely decline. But the magnitude of these effects are difficult to predict, and could range from marginal to potentially large. Those U.S. multinational firms operating in Europe would likely benefit from a stronger EC economy and from reduced transactions costs involved in a single EC currency, just as EC firms will. Although unforeseen events could deter EMU from becoming effective by 1999, at present the momentum towards EMU is strong, and it is much more likely than at any time in the past.
