Samuel I. Katz
The opening paper by Lamfalussy was intended to provide a common background for participants through a general introduction to the problems of global and regional integration. Could these two objectives be reconciled? Or were European attempts at regional union necessarily in conflict with efforts at global monetary arrangements? Did European leaders have to choose whether to give priority to policy strategies aimed at global or at regional objectives?
The Lamfalussy Paper. Alexandre Lamfalussy (economic adviser, Bank for International Settlements) attributed the recent failure of regional integration to the European response to the series of external shocks in the world economy after 1973. Differences in policy response based on differences in economic structure and in policy preferences, not the external shocks themselves, were responsible for destroying hopes for regional integration.
Despite this experience, Lamfalussy thought that a reopening of the discussion about European integration was justified at this time, primarily because the adjustment process under floating rates had not worked well in Europe. He found a disenchantment there with floating on the grounds that it had discouraged private investment and had encouraged a process of vicious and virtuous circles that was encouraging disparate rates of inflation and of changes in currency values among the European trading partners. The discussion of the vicious and virtuous circle argument (or, as we shall call it, the VC hypothesis) was to prove perhaps the topic of primary interest to conference participants.
Lamfalussy presented an analysis of the VC hypothesis applicable to small European countries that (1) are price takers, (2) have substantial tradable goods in domestic output, (3) transmit higher prices for tradable goods to home goods through expenditure switching and adjustments of wages to the retail price index, and (4) experience