Since its establishment at the end of December 1945, the role of the IMF has changed considerably... more Since its establishment at the end of December 1945, the role of the IMF has changed considerably because of the abandonment of the fixed exchange rate system, but also because of the rise of financial globalisation, which has profoundly the way that the institution was supposed to administer (Kirrane 1995). In addition, these countries today have little need of any financial support from the IMF as they can easily rely on international capital markets. The activity of the Fund has therefore shifted both sectorially and geographically. It has increased its supervisory role; at the same time, the focus of its interventions has gradually shifted to developing countries and economies in transition. In fact, the IMF is in a sense condemned to focus on the countries it can influence through the conditions attached to the loans it grants (Padoa-Schioppa and Saccomanni 1994). On the occasion of the IMF's 50th anniversary in 1994, the Director General, Michel Camdessus, stated that the institution was adapting to changing circumstances without renouncing its original mandate. Thus, although it is true that surveillance, which was part of the original mandate of the Fund, is still its main area of action after having taken precedence over the objective of exchange stabilisation from 1976, 1 it remains to question the effectiveness of these interventions during the Asian crisis. During the summer of 1997, East Asia was plagued by financial difficulties (banking crises, foreign exchange crises, etc.). The crisis erupted in early July with the decision of the Thai authorities, under the pressure of repeated speculative attacks since the beginning of the year, to float the baht, then their appeal to the IMF. The appreciation of the dollar against the yen and the main European currencies was the detonator of the crisis. Indeed, this persistent appreciation since the summer of 1995 rendered the policy of anchoring the Thai currency to the dollar more and more unsustainable, aggravating the difficulties already experienced by the country, in 1 In 1976, the IMF's statutes were amended for the second time. The Fund is then responsible for promoting a stable exchange rate system and no longer defending a system of stable exchange rates (fixed but adjustable). The IMF Fund is now focused on crisis prevention and management, particularly in developing and transition countries. While confirming that the IMF as a centerpiece of the international financial system, the Asian crisis tends to demonstrate the limits, or excesses, of its action. A redefinition of its role and mandate seems necessary.
1. FREE TRADE AND LIBERALISATION OF CAPITAL MOVEMENTS Since 1 January 1948, the GATT (General Agr... more 1. FREE TRADE AND LIBERALISATION OF CAPITAL MOVEMENTS Since 1 January 1948, the GATT (General Agreement on Tariffs and Trade) and since 1January 1995, the WTO (World Organization), which, after eight rounds of multilateral trade negotiations, strove to reduce and even eliminate barriers to the international mobility of goods and services 1. The counterpart of the WTO (164 members) is the IMF (International Monetary Fund) with 189 members, originally designed at Bretton Woods in July 1944, to recycle surplus liquidity from developed to developed countries. Since 1973-74, this function has been carried out mainly in developing countries (Kirrane 1995). Unlike the WTO, in its field, the IMF's statutes do not require it to liberalise international capital movements. Article VI even explicitly allows the use of controls if capital flows threaten the economic stability of countries. From a theoretical point of view, there are indeed major differences between the welfare contribution of free trade for goods and services and that which can be derived from the free international mobility of capital. In fact, there are two arguments that make international capital mobility less desirable and riskier for a country than free trade for goods and services.
The euro, which replaced eleven national currencies on 1 January 1999, became the single currency... more The euro, which replaced eleven national currencies on 1 January 1999, became the single currency of the European Union. It is therefore an international currency, which is not without important consequences for the international monetary system. Can the euro fulfill the functions of such a currency: the answer is affirmative. Will it actually fulfill these functions and become a competitor of the dollar? The answer is more uncertain: yes, but without knowing to what extent or at what rate. One of the reasons for this uncertainty is the offer of the euro as an international currency, that is to say the terms of its creation, which will be linked to the international transactions of the Union. Finally, the international monetary system is still that of Bretton Woods, in which the IMF plays an important role: how will the Euro be represented, how will the Fund integrate the euro into its operations, such as the SDR, and how will it monitor exchange rate policies? EMU accelerated with the adoption of the Delors Plan for Economic and Monetary Union in Europe 1n1989. As the project took shape and when it appeared that it was likely to come to fruition, one of the most debated issues concerned the international role the euro could play and, beyond that, the impact that this new currency would have on the international monetary system. The answer was not easy as the contours of the future monetary union, remained uncertain. Would the United Kingdom enter, and sterling cease to exist? Would Italy and Spain also enter and allow better compensation within the EU between the countries of the North and the countries of the South? These uncertainties were lifted in May 1998, together with that relating to the calculation of conversion rates in euros. On January 1, 1999, eleven countries formed the currency union and the euro replaced eleven national currencies. National currencies could still be used for three years and coins and banknotes for six months longer. Since 1 January 1999, the euro has therefore been able to develop its international role, which will not be without consequences for the international monetary system (Kirrane 1996). This system is currently two-sided. The official face corresponds to the rules enacted at Bretton Woods and several times since amended. The euro will be a problem at this level, for example, the International Monetary Fund, had to replace eleven national currencies. In addition, the supervision exercised by the Fund, as well as the conditionality to which its aid is subject, will henceforth concern the Union at the same time as each member country (Kirrane 1995). The mark is replaced by the euro, which naturally becomes a much more serious competitor for the dollar, and even more so for the yen. Monetary polycentrism may be rapidly realised, but in
This article examines the institutional changes of Central Banks and the exchange rate regimes of... more This article examines the institutional changes of Central Banks and the exchange rate regimes of Eastern European countries joining the EU. Current regimes and how they need to evolve in order to meet the entry criteria of the EU and EMU are looked at. In addition, the degree to which the candidate countries meet the accession criteria and compare them with the performance of the latest EU entrants will be studied. After concluding that the accession criteria do not necessarily favour a particular exchange rate regime, the pros and cons of the two plans considered as the most stable, currency board and inflation target will be analysed. Under these two regimes, the respect of the criteria of low inflation and exchange rate stability is likely to produce strong tensions. This paper examines the institutional developments of central banks and exchange rate regimes of the old centralised economies of Eastern European countries who have become candidates for accession to the European Union. There are ten countries in the group of 'official candidate' countries out of the thirteen countries selected in March 1998 by the process that will make the enlargement of the European Union possible (Bulgaria,
This paper describes the opportunities and also the difficulties of EMU with regard to internatio... more This paper describes the opportunities and also the difficulties of EMU with regard to international monetary cooperation. Even though the institutional and intellectual assistance to the coordination of monetary policy in the EU will probably be strengthened with the EMU, among the shortcomings of the Maastricht Treaty concerns the relationship between the founder members and those countries who wish to remain outside monetary union. Even though remedies exist, this problem is currently the main threat to monetary cohesion in Europe and also wider economic and political integration. The institutional and intellectual support for monetary cooperation in the G7 is insufficient. The transition to the third stage of EMU will accentuate this particular deficiency European and international monetary cooperation Monetary issues are not one of the predominant areas of cooperation between the United States and Europe. If a ranking were established, interest rate and exchange rate policies would be secondary to the regulation of financial markets and trade. Nevertheless, cooperation between the United States and Europe and, more generally, between the central banks and the G7 governments has sometimes played a major role, for instance, when the dollar soared in the mid-80s and collapsed in 1994, and during exceptional crises such as in Mexico in 1995. European monetary unification could end such timid initiatives. The European Central Bank (ECB) will assume the tasks of the central banks of the EU Member States participating in monetary union. The EU Council of Ministers (in consultation with the ECB, European Commission and European Parliament) will make decisions about European involvement in any new global agreement on exchange rates. It is understood that European policymakers and others are concerned about how these institutions will manage the monetary affairs of the newly formed euro area, regardless of the consequences for the cooperation with the rest of the world. However, many Americans are unaware of this process and this is unfortunate because there is evidence that economic and monetary union (EMU) will actually make international monetary cooperation more necessary. Until the transition to the third stage of the Maastricht process, uncertainties about the timing and composition of monetary union could increase the volatility of exchange rates of European currencies against the dollar. Any tendency for the ECB to liquidate excess dollar reserves inherited from the national central banks could further disrupt the foreign exchange market. The stability of the currency market is a shared priority of both Europe and the United States and it could generate calls for more concerted action and other forms of international monetary cooperation. The scholarly consensus is to help policy makers agree on a set of adjustments to economic policy. Strictly speaking, policy coordination does not require that policy makers from different countries share the same point of view. Politicians must justify their actions to their constituents and the credibility of their argument could be questioned if they are contradicting each other. So it is preferable that there is
Historical examination of the Bretton Woods system allows comparisons to be made with the current... more Historical examination of the Bretton Woods system allows comparisons to be made with the current evolution of the EMS. In the past, three main varieties of monetary arrangements have prevailed. One variety is 'decentralised unconstrained systems' in which the sovereignty of each country over its monetary policy is complete (e. g. floating exchange rates arrangements). Another variety is 'fully centralised systems' in which monetary policy is transferred to some supranational authority. Finally, a hybrid variety is 'decentralised but constrained systems' (e. g. the Bretton Woods system and the EMS) where nations are usually (i) sovereign over their domestic policies, but (ii) constrained by a set of widespread rules (for instance, they need to take into account the policies of different nations). This paper attempts to provide a cost-benefit analysis of these various options. Two chief conclusions emerge. Firstly, the apparent autonomy provided} under the 'decentralised unconstrained system' is most likely illusory as the inherent difficulties associated with floating of the various currencies wipe out most of the advantages related to sovereignty. Secondly, 'decentralised but unconstrained systems' such as EMS usually induce a deflationary bias which renders these kinds of arrangements both costly as well as unsustainable. This finally indicates that the fundamental dilemma of global arrangements is that there might not be a stable regime without the construction of a supranational monetary policy institution.
Monetary integration has both costs and benefits. Europeans have a strong aversion to exchange ra... more Monetary integration has both costs and benefits. Europeans have a strong aversion to exchange rate instability. From this perspective, the EMS has shown its limits and full monetary union involving a single currency appears to be a necessity. This is the goal of the EMU project contained in the Maastricht Treaty. This paper examines the pertinent choices: independence of the Central Bank, budgetary discipline and economic policy coordination. Therefore, the implications of EMU for the economic policy of France will be examined. If the external force disappears, the public sector still cannot circumvent its solvency constraint. The instrument of national monetary policy will not be available so the absorption of asymmetric shocks will require greater wage flexibility and fiscal policy will play a greater role. The paper includes three parts. The first concerns the economic foundations of monetary union and the costs it entails. The second is devoted to the institutional arrangements under the Treaty of Maastricht. The third examines the consequences of monetary union for the economy and the economic policy of France. Why EMU? Monetary union, which can be characterised by the combination of the freedom of capital movements and irrevocable exchange rates is one of the possible monetary regimes for economically highly integrated nations. A high degree of integration of the goods market, such as that seen in the countries of the European Community, does not automatically imply that choice. It is, in reality, the preference of Europeans for exchange rate stability that creates a link between the single market and monetary union. This preference has been repeatedly demonstrated since the abandonment of the Bretton Woods system through the establishment of the European currency snake and that of the European Monetary System. It explains the micro-economic point of view (because the fixed exchange rate promotes economic integration), the macroeconomic point of view (because it prevents non-cooperative attitudes), and also by institutional factors common policy management as in the CAP. 1 Unlike economic integration theory that stresses unambiguous benefits, monetary union has costs (Mundell, (1961)). Economic analysis does not quantify the costs and benefits associated with the choice of exchange rate regime. At most it allows partial assessments (Emerson et al. (1991)). However, it provides guidance for establishing an objective balance of pros and cons to decide if this plan is or is not preferable to the others, particularly the current monetary regime of the majority of countries of the European Community: the EMS 1 See, on this point, Giavazzi and Giovannini (1989).
This paper examines the history of previous examples of EMU from the viewpoint that state actors ... more This paper examines the history of previous examples of EMU from the viewpoint that state actors make decisions about whether to participate in a monetary union based on rational self-interest concerning costs and benefits to their national economies. Illustrative examples are taken from nineteenth century German, Italian and Japanese attempts at monetary integration with early twentieth century ones from the Latin Monetary Union and the Scandinavian Monetary Union and contemporary ones from the West African Monetary Union and the European Monetary System. Lessons learned from the historical examples will be used to identify issues that could arise with the move towards closer EMU in Europe.
Since its establishment at the end of December 1945, the role of the IMF has changed considerably... more Since its establishment at the end of December 1945, the role of the IMF has changed considerably because of the abandonment of the fixed exchange rate system, but also because of the rise of financial globalisation, which has profoundly the way that the institution was supposed to administer (Kirrane 1995). In addition, these countries today have little need of any financial support from the IMF as they can easily rely on international capital markets. The activity of the Fund has therefore shifted both sectorially and geographically. It has increased its supervisory role; at the same time, the focus of its interventions has gradually shifted to developing countries and economies in transition. In fact, the IMF is in a sense condemned to focus on the countries it can influence through the conditions attached to the loans it grants (Padoa-Schioppa and Saccomanni 1994). On the occasion of the IMF's 50th anniversary in 1994, the Director General, Michel Camdessus, stated that the institution was adapting to changing circumstances without renouncing its original mandate. Thus, although it is true that surveillance, which was part of the original mandate of the Fund, is still its main area of action after having taken precedence over the objective of exchange stabilisation from 1976, 1 it remains to question the effectiveness of these interventions during the Asian crisis. During the summer of 1997, East Asia was plagued by financial difficulties (banking crises, foreign exchange crises, etc.). The crisis erupted in early July with the decision of the Thai authorities, under the pressure of repeated speculative attacks since the beginning of the year, to float the baht, then their appeal to the IMF. The appreciation of the dollar against the yen and the main European currencies was the detonator of the crisis. Indeed, this persistent appreciation since the summer of 1995 rendered the policy of anchoring the Thai currency to the dollar more and more unsustainable, aggravating the difficulties already experienced by the country, in 1 In 1976, the IMF's statutes were amended for the second time. The Fund is then responsible for promoting a stable exchange rate system and no longer defending a system of stable exchange rates (fixed but adjustable). The IMF Fund is now focused on crisis prevention and management, particularly in developing and transition countries. While confirming that the IMF as a centerpiece of the international financial system, the Asian crisis tends to demonstrate the limits, or excesses, of its action. A redefinition of its role and mandate seems necessary.
1. FREE TRADE AND LIBERALISATION OF CAPITAL MOVEMENTS Since 1 January 1948, the GATT (General Agr... more 1. FREE TRADE AND LIBERALISATION OF CAPITAL MOVEMENTS Since 1 January 1948, the GATT (General Agreement on Tariffs and Trade) and since 1January 1995, the WTO (World Organization), which, after eight rounds of multilateral trade negotiations, strove to reduce and even eliminate barriers to the international mobility of goods and services 1. The counterpart of the WTO (164 members) is the IMF (International Monetary Fund) with 189 members, originally designed at Bretton Woods in July 1944, to recycle surplus liquidity from developed to developed countries. Since 1973-74, this function has been carried out mainly in developing countries (Kirrane 1995). Unlike the WTO, in its field, the IMF's statutes do not require it to liberalise international capital movements. Article VI even explicitly allows the use of controls if capital flows threaten the economic stability of countries. From a theoretical point of view, there are indeed major differences between the welfare contribution of free trade for goods and services and that which can be derived from the free international mobility of capital. In fact, there are two arguments that make international capital mobility less desirable and riskier for a country than free trade for goods and services.
The euro, which replaced eleven national currencies on 1 January 1999, became the single currency... more The euro, which replaced eleven national currencies on 1 January 1999, became the single currency of the European Union. It is therefore an international currency, which is not without important consequences for the international monetary system. Can the euro fulfill the functions of such a currency: the answer is affirmative. Will it actually fulfill these functions and become a competitor of the dollar? The answer is more uncertain: yes, but without knowing to what extent or at what rate. One of the reasons for this uncertainty is the offer of the euro as an international currency, that is to say the terms of its creation, which will be linked to the international transactions of the Union. Finally, the international monetary system is still that of Bretton Woods, in which the IMF plays an important role: how will the Euro be represented, how will the Fund integrate the euro into its operations, such as the SDR, and how will it monitor exchange rate policies? EMU accelerated with the adoption of the Delors Plan for Economic and Monetary Union in Europe 1n1989. As the project took shape and when it appeared that it was likely to come to fruition, one of the most debated issues concerned the international role the euro could play and, beyond that, the impact that this new currency would have on the international monetary system. The answer was not easy as the contours of the future monetary union, remained uncertain. Would the United Kingdom enter, and sterling cease to exist? Would Italy and Spain also enter and allow better compensation within the EU between the countries of the North and the countries of the South? These uncertainties were lifted in May 1998, together with that relating to the calculation of conversion rates in euros. On January 1, 1999, eleven countries formed the currency union and the euro replaced eleven national currencies. National currencies could still be used for three years and coins and banknotes for six months longer. Since 1 January 1999, the euro has therefore been able to develop its international role, which will not be without consequences for the international monetary system (Kirrane 1996). This system is currently two-sided. The official face corresponds to the rules enacted at Bretton Woods and several times since amended. The euro will be a problem at this level, for example, the International Monetary Fund, had to replace eleven national currencies. In addition, the supervision exercised by the Fund, as well as the conditionality to which its aid is subject, will henceforth concern the Union at the same time as each member country (Kirrane 1995). The mark is replaced by the euro, which naturally becomes a much more serious competitor for the dollar, and even more so for the yen. Monetary polycentrism may be rapidly realised, but in
This article examines the institutional changes of Central Banks and the exchange rate regimes of... more This article examines the institutional changes of Central Banks and the exchange rate regimes of Eastern European countries joining the EU. Current regimes and how they need to evolve in order to meet the entry criteria of the EU and EMU are looked at. In addition, the degree to which the candidate countries meet the accession criteria and compare them with the performance of the latest EU entrants will be studied. After concluding that the accession criteria do not necessarily favour a particular exchange rate regime, the pros and cons of the two plans considered as the most stable, currency board and inflation target will be analysed. Under these two regimes, the respect of the criteria of low inflation and exchange rate stability is likely to produce strong tensions. This paper examines the institutional developments of central banks and exchange rate regimes of the old centralised economies of Eastern European countries who have become candidates for accession to the European Union. There are ten countries in the group of 'official candidate' countries out of the thirteen countries selected in March 1998 by the process that will make the enlargement of the European Union possible (Bulgaria,
This paper describes the opportunities and also the difficulties of EMU with regard to internatio... more This paper describes the opportunities and also the difficulties of EMU with regard to international monetary cooperation. Even though the institutional and intellectual assistance to the coordination of monetary policy in the EU will probably be strengthened with the EMU, among the shortcomings of the Maastricht Treaty concerns the relationship between the founder members and those countries who wish to remain outside monetary union. Even though remedies exist, this problem is currently the main threat to monetary cohesion in Europe and also wider economic and political integration. The institutional and intellectual support for monetary cooperation in the G7 is insufficient. The transition to the third stage of EMU will accentuate this particular deficiency European and international monetary cooperation Monetary issues are not one of the predominant areas of cooperation between the United States and Europe. If a ranking were established, interest rate and exchange rate policies would be secondary to the regulation of financial markets and trade. Nevertheless, cooperation between the United States and Europe and, more generally, between the central banks and the G7 governments has sometimes played a major role, for instance, when the dollar soared in the mid-80s and collapsed in 1994, and during exceptional crises such as in Mexico in 1995. European monetary unification could end such timid initiatives. The European Central Bank (ECB) will assume the tasks of the central banks of the EU Member States participating in monetary union. The EU Council of Ministers (in consultation with the ECB, European Commission and European Parliament) will make decisions about European involvement in any new global agreement on exchange rates. It is understood that European policymakers and others are concerned about how these institutions will manage the monetary affairs of the newly formed euro area, regardless of the consequences for the cooperation with the rest of the world. However, many Americans are unaware of this process and this is unfortunate because there is evidence that economic and monetary union (EMU) will actually make international monetary cooperation more necessary. Until the transition to the third stage of the Maastricht process, uncertainties about the timing and composition of monetary union could increase the volatility of exchange rates of European currencies against the dollar. Any tendency for the ECB to liquidate excess dollar reserves inherited from the national central banks could further disrupt the foreign exchange market. The stability of the currency market is a shared priority of both Europe and the United States and it could generate calls for more concerted action and other forms of international monetary cooperation. The scholarly consensus is to help policy makers agree on a set of adjustments to economic policy. Strictly speaking, policy coordination does not require that policy makers from different countries share the same point of view. Politicians must justify their actions to their constituents and the credibility of their argument could be questioned if they are contradicting each other. So it is preferable that there is
Historical examination of the Bretton Woods system allows comparisons to be made with the current... more Historical examination of the Bretton Woods system allows comparisons to be made with the current evolution of the EMS. In the past, three main varieties of monetary arrangements have prevailed. One variety is 'decentralised unconstrained systems' in which the sovereignty of each country over its monetary policy is complete (e. g. floating exchange rates arrangements). Another variety is 'fully centralised systems' in which monetary policy is transferred to some supranational authority. Finally, a hybrid variety is 'decentralised but constrained systems' (e. g. the Bretton Woods system and the EMS) where nations are usually (i) sovereign over their domestic policies, but (ii) constrained by a set of widespread rules (for instance, they need to take into account the policies of different nations). This paper attempts to provide a cost-benefit analysis of these various options. Two chief conclusions emerge. Firstly, the apparent autonomy provided} under the 'decentralised unconstrained system' is most likely illusory as the inherent difficulties associated with floating of the various currencies wipe out most of the advantages related to sovereignty. Secondly, 'decentralised but unconstrained systems' such as EMS usually induce a deflationary bias which renders these kinds of arrangements both costly as well as unsustainable. This finally indicates that the fundamental dilemma of global arrangements is that there might not be a stable regime without the construction of a supranational monetary policy institution.
Monetary integration has both costs and benefits. Europeans have a strong aversion to exchange ra... more Monetary integration has both costs and benefits. Europeans have a strong aversion to exchange rate instability. From this perspective, the EMS has shown its limits and full monetary union involving a single currency appears to be a necessity. This is the goal of the EMU project contained in the Maastricht Treaty. This paper examines the pertinent choices: independence of the Central Bank, budgetary discipline and economic policy coordination. Therefore, the implications of EMU for the economic policy of France will be examined. If the external force disappears, the public sector still cannot circumvent its solvency constraint. The instrument of national monetary policy will not be available so the absorption of asymmetric shocks will require greater wage flexibility and fiscal policy will play a greater role. The paper includes three parts. The first concerns the economic foundations of monetary union and the costs it entails. The second is devoted to the institutional arrangements under the Treaty of Maastricht. The third examines the consequences of monetary union for the economy and the economic policy of France. Why EMU? Monetary union, which can be characterised by the combination of the freedom of capital movements and irrevocable exchange rates is one of the possible monetary regimes for economically highly integrated nations. A high degree of integration of the goods market, such as that seen in the countries of the European Community, does not automatically imply that choice. It is, in reality, the preference of Europeans for exchange rate stability that creates a link between the single market and monetary union. This preference has been repeatedly demonstrated since the abandonment of the Bretton Woods system through the establishment of the European currency snake and that of the European Monetary System. It explains the micro-economic point of view (because the fixed exchange rate promotes economic integration), the macroeconomic point of view (because it prevents non-cooperative attitudes), and also by institutional factors common policy management as in the CAP. 1 Unlike economic integration theory that stresses unambiguous benefits, monetary union has costs (Mundell, (1961)). Economic analysis does not quantify the costs and benefits associated with the choice of exchange rate regime. At most it allows partial assessments (Emerson et al. (1991)). However, it provides guidance for establishing an objective balance of pros and cons to decide if this plan is or is not preferable to the others, particularly the current monetary regime of the majority of countries of the European Community: the EMS 1 See, on this point, Giavazzi and Giovannini (1989).
This paper examines the history of previous examples of EMU from the viewpoint that state actors ... more This paper examines the history of previous examples of EMU from the viewpoint that state actors make decisions about whether to participate in a monetary union based on rational self-interest concerning costs and benefits to their national economies. Illustrative examples are taken from nineteenth century German, Italian and Japanese attempts at monetary integration with early twentieth century ones from the Latin Monetary Union and the Scandinavian Monetary Union and contemporary ones from the West African Monetary Union and the European Monetary System. Lessons learned from the historical examples will be used to identify issues that could arise with the move towards closer EMU in Europe.
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Papers by Chris Kirrane