We have considered in this paper various actions that may usefully be taken in the Common Market in regard to target zones for exchange rates and the coordination of monetary and fiscal policies. Implementing the recommendations made in the paper would, however, involve limiting the sovereignty of the EEC countries in economic policy making.
At the same time, it should be recognized that the freedom of action these countries enjoy at present is more circumscribed than is commonly assumed. This is because the increased interdependence of their national economies through trade reduces the effectiveness of policy measures taken by the individual countries. And while the larger countries are less exposed to foreign trade and hence experience a smaller spillover in the form of higher imports and lower exports, the use of formal and informal wage indexing limits the effectiveness of exchange-rate changes. As a result, a depreciation in the exchange rate occasioned by speculative flows may be validated, at least partially, through higher wages and prices. These consequences can be avoided if mutual support is provided to avoid excessive fluctuations in exchange rates.
Excessive fluctuations in exchange rates also increase uncertainty in international transactions and, in particular, in planning new investments, with adverse effects for the operation of the Common Market. This conclusion is strengthened if we consider the cleavage between snake and non-snake countries that has become increasingly apparent.
Avoiding excessive fluctuations in exchange rates through the application of the target zone approach would thus bring benefits to the member countries. At the same time, for the reasons discussed in the paper, the target zone approach would need to be complemented by the coordination of monetary and fiscal policies on the Common Market level.