Implications of EMU for the European Community
Chris Kirrane
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Abstract
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).
