Economics Update (October-December 1997)

European Monetary Union
Faces Tough Decisions

I magine traveling to Paris, Amsterdam, Berlin and Rome — and being able to use the same currency in all four cities.

This trip could occur in the not-too-distant future, says Atlanta Fed economist Joseph A. Whitt Jr. in an article in the Third Quarter 1997 issue of Economic Review. If the plans of European governments for economic and monetary union (EMU) are realized, says Whitt, within five years a new common currency called the euro will be in use in at least a few western European countries.

Even earlier, starting in 1999, a new European Central Bank is slated to take control of monetary policy in the uniting countries, and exchange rates between those members will be fixed permanently.

The selection of initial members is scheduled for early 1998, but hurdles remain that could delay or kill the plan, says Whitt. The biggest stumbling block is that many prospective members, including the largest, Germany, will probably fail to meet some of the requirements for membership.

Three Options for the Union

Debate over what will happen when the deadline for beginning the monetary union is reached has centered on three main possibilities: a maxi-union, a mini-union or delay.

A maxi-union would cover most of the European Union, including at least three of the four largest potential members — Germany, France, Italy and Britain.

The biggest question marks for entry are Italy and Britain. Italy wants to join but has been in violation of the membership criteria for several years. Britain might join if nearly all the other members, including Italy, decide to start together in 1999.

A mini-union would probably include Germany, France, the Benelux countries, and perhaps one or two other small countries that have met several of the membership criteria. The chief problem with a mini-union, Whitt points out, is that, even in this smaller group, several countries are in violation of at least one of the fiscal criteria.

A third option would be to delay the union to give countries more time to come into compliance with the criteria. One risk with delay is that other obstacles could arise that might put off the union indefinitely.

As evidence of the probability of union, Whitt points out that by early 1997 financial market participants seemed to believe that a union encompassing a substantial portion of western Europe would ensue from discussions early next year.

Return to Index