European-Monetary-System

Professor Peter Kenen is a leading US expert on international economic relations. In this excellent little book, he analyses the prospects for Economic and Monetary Union.

Firstly, he shows the difficulties that countries are having when their governments try to meet the criteria for Economic and Monetary Union. He points out that in 1994 none of the twelve European Community countries met all four criteria; Italy and Portugal met none of them. Six countries failed the inflation test; two had interest rates too high; ten had fiscal deficits too high, and eight had excessive public debts.

Since then, European Union economies have stagnated or shrunk, so they are even further from meeting the criteria. Four of the six countries with debt ratios above 75 per cent of Gross Domestic Product (GDP) in 1993 ran bigger budget deficits in 1994 than in 1992, so they would have to make even bigger cuts in their deficits before they can start to cut their debt ratios.

The Governments are in a dilemma: they cannot cut their budget deficits quickly to the stipulated three per cent without depressing real economic activity. And the more they deflate their economies, the less popular support there is for Economic and Monetary Union. Professor Kenen sums up, "It is thus unlikely that a majority of EC countries will be ready for Stage Three in 1997, when a majority is required to set a starting date, and it may be hard to muster a majority in 1999 - although a majority is not needed then." Stage Three is supposed to start automatically in 1999!

Secondly, Kenen studies the likely results if Governments seriously try to meet the criteria. He cites Buiter et al, writing in Economic Policy: "Greece, Italy, Belgium and Ireland need serious fiscal retrenchment, but getting even halfway to the Maastricht debt targets ... involves dangerous fiscal overkill. A blatantly unrealistic debt target is unhelpful for these countries in designing effective fiscal programs." They write that the necessary scale of retrenchment would involve "the economics of the lunatic asylum."

Kenen also cites the Centre for European Policy Studies in Brussels, which says that "If the Maastricht targets are adhered to, something significant will have to give in terms of public expenditure in many EC countries, with social consequences which could be highly disruptive. Clawing back public deficits which are across the Community higher in GDP percentage terms than they have been at any moment since the EC was founded, at a time when more and more 'legitimate' demands are made on the public purse, looks increasingly like trying to run up a downward moving escalator."

Thirdly, Kenen looks at the costs of joining Economic and Monetary Union. He cites the economists Ghosh and Wolf who estimate that joining it would cost as much as 2.5 per cent of the European Union's total GDP. The European Union's own employment committee said that Economic and Monetary Union would destroy ten million jobs in the European Union.

Supporters of Economic and Monetary Union like to claim that it would curb the speculators, tame finance capital, and end financial crises. But what does Kenen conclude? "In the first years of Economic and Monetary Union, then, the G-7 countries may find it harder to agree on policies and strategies for exchange rate management, and Economic and Monetary Union may thus lead to exchange rate fluctuations wider than those seen since the Louvre Accord [of 1987]. That would be truly ironic. Economic and Monetary Union is meant to replace the EMS (European Monetary System), which emerged from the desire to create a zone of monetary stability in Europe. Yet the achievement of that goal may have the effect of producing greater exchange rate instability at the global level."

A single European currency would not end speculation. It would still be operating in the world of global speculative flows. A single currency would be the focus for speculation against the dollar and the yen, and a smaller number of currencies could generate even more rapid and destabilising speculative flows.

So, to sum up, Kenen's book shows us that Economic and Monetary Union would be extremely difficult and painful to achieve. It would mean savage cuts in public spending (an estimated £18 billion in Britain), a 2.5 per cent reduction in GDP, and greater exchange rate instability. The cuts in public spending would also increase unemployment, reduce wages and worsen our public services...

EMU is the most important international economic event since the Bretton Woods Agreements of 1944.It will represent a further step in the process of economic integration within the European Union. The effects of the monetary union will be felt primarily in the Euro area participating countries. At the same time, Euro will affect international monetary system. Euro's taking its place among the major international currencies is going to be gradual. This process will be quite important for the countries those with the close economic relationships with the European Monetary Union member countries. This book is a must read for all interested in the Euro...

I'm an undergraduate student in Finance and Economics. I picked up this book for a term paper for my Public Economics class.

If there's one thing to say about De Grauwe's book is that it seemed very useful, down to earth, in contrast to other economics books I've read. The concepts covered in the book were explained very clearly, and for someone interested in the area, the theories seemed ready for use for application in understanding the important issues of monetary integration.

Whether there are flaws in the theory are--honestly--beyond my grasp; I'd have to read more. The book seems written and revised fairly enough and hasn't received negative comments from the faculty at my university. If someone else has a contrary opinion, I'm sure it'd help for people to hear.

Check the sample pages if you want to see if this book would be good for you.

As an economist at the EC I found this book a good reference work on EMU, strong especially on the history of ERM and EMU and the institutional set-up of both. The arguments pro and con on EMU were well presented and often subtle. Overall highly recommended as textbook for graduate students and professional economists.