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European Monetary Integration

Past, Present and Future

Edited by Eric J. Pentecost and André Van Poeck

This highly topical book examines the development and future prospects for economic and monetary union in Europe. European Monetary Integration examines the background to economic and monetary union from a historical perspective that distinguishes between national and supranational currency areas, and an optimal currency area theory. The gradualist transition process is also considered.
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Chapter 2: The political economy of transition to monetary union in Western Europe

Eric J. Pentecost


Eric J. Pentecost 1 INTRODUCTION The Oxford English Dictionary defines ‘transition’ as ‘the passage from one state, subject, or set of circumstances to another’. In the context of European Monetary Union (EMU) the passage is from a state of separate national currencies with national central banks – referred to as a pseudo monetary union – to a common, single European Union currency with a single central bank – that is, a complete monetary union. The distinction between a pseudo currency union and a complete monetary union is very important. In a pseudo union the various member countries still have their own central banks and foreign exchange reserves and hence still determine their own money supply or credit policies. The members of a pseudo union, however, agree to manage their monetary and credit policies so as to maintain fixed exchange rate relationships between the participant currencies. There may also be some arrangements where surplus countries provide limited short-term financing for deficit countries and where capital controls prevail to limit speculative attacks on member currencies. By contrast in a complete exchange rate union, foreign exchange reserves are pooled and there is a central monetary authority. There is therefore complete assurance that the fixed exchange rate relationships will be maintained, without the need of capital controls, and the central monetary authority operates a union-wide monetary policy. The transition from a pseudo to a complete exchange rate union in Western Europe is the principal concern of this chapter. Such a transition, however, is not merely...

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