European monetary integration : experiences and future prospects

In November 1991, some 12 years after the installation of the European Exchange-Rate Mechanism (ERM), a further step towards monetary integration in Europe was decided upon in Maastricht. This has led to an intensive debate among politicians and economists about the potential benefits and drawbacks of a European Monetary Union (EMU). In Germany, it is first and foremost the scientific community , which doubts the benefits and emphasizes the risks concerning EMU (see BABELER; et. Al., 1992; BAREIS; et al., 1992), while most politicians and managers accentuate the benefits rather than the risks. In the other member countries, however, the situation is somewhat different. As a matter of fact, the dispute about how much monetary cooperation and integration in Europe should be pursued is anything but new. Ever since the ERM was installed, it has frequently been discussed whether or not it is capable of improving exchange-rate stability and monetary convergence with a low level of inflation. Corresponding, it has also been disputed whether this system serves as an appropriate preparation for the next step, the EMU. This paper attempts to provide some answers to these questions. First, the most prominent potential benefits of a single European currency are briefly presented. Then, the ERM\u27s impact in forcing monetary convergence and stability in Europe is analyzed. The resulting question: Can a further monetary integration in the direction of a single European currency guarantee macroeconomic stability, both in the transition to EMU and later on is discussed in the third part. Finally, some remarks on the importance of fiscal discipline in the EC member states will be made