International Finance: Contemporary Issues

By Dilip K. Das | Go to book overview

12

ONE CURRENCY FOR EUROPE

From theory to practice

André Fourçans


INTRODUCTION

Were the founding fathers of the EC planning for one currency for Europe? The Rome Treaty of 1957 made no reference at all to such an objective. It was only at the Hague conference in 1969 that monetary union was first adopted as a long-term goal of the Community. Since then, this idea has had its ups and downs over time. Today it seems to be at an all time high, especially after the Treaty adopted in Maastricht in December 1991 and signed in February 1992.

In spite of the new impetus given to monetary union the debate about the need for a single currency is still ongoing. In the following section we study the conceptual background of the question. Despite some drawbacks we conclude that a single currency would be a great help in creating economic integration as well as monetary stability, as long as some conditions are fulfilled. Counter positions to that view are also analysed: fixed exchange rates with national monies, flexible exchange rates and competitive monies.

In the third section we concentrate on European monetary union per se. We study the strategy adopted in Maastricht in order to create a single currency, with special emphasis on the transition period towards integration. We also discuss to what extent fiscal policy co-ordination is necessary and the role that the ECU should play in the process.

The final and concluding section sets forth the necessity for close co-ordination of monetary policies as well as the need for a European central bank, with the main measures to be adopted for achieving this.


IS THERE A NEED FOR A SINGLE CURRENCY?

The pros of a single currency

The role of money

To understand better the advantage of monetary union we must go back to the fundamental role of money. Economically, it is this conceptual background that justifies the progress towards monetary union and a single currency. 1 Such a reminder is essential in so far as many discussions on European questions seem to forget it.

The use of money diminishes information and transaction costs of trade. As a unit of account, medium of exchange and store of value, money demonstrates a high economic and social productivity. It reduces uncertainty and costs associated with economic activity by reducing resources necessary to acquire, process and stock information and to pursue production and transaction activities (Brunner and Meltzer 1971). These advantages increase with the currency domain (Mundell 1961). In other words, the qualitative arguments in favour of a single currency are the same as those in favour of a monetary rather than a barter economy, even though the quantitative gains to be expected from the transition from a multi-currency to a single-currency domain are less than those from a barter to a monetary economy.

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