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The Euro

Evolution and Prospects

Philip Arestis, Andrew Brown and Malcolm Sawyer

The authors offer a sustained argument that the single currency as currently implemented does not promise to deliver prolonged growth. They contend that the economic impact of the euro, and its accompanying institutions, is likely to be destabilising and deflationary; that the political impact is profoundly undemocratic and that the social consequences are likely to be deleterious. They do not reject the concept of a single currency but are highly critical of policy arrangements such as the Stability and Growth Pact which govern the euro. The authors propose alternative policy and institutional arrangements within which the euro should be embedded. They demonstrate that these would have the benefits of a single currency whilst avoiding many of the potential costs identified by detractors.
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Chapter 4: Monetary and Financial Arrangements Accompanying the Euro

Philip Arestis, Andrew Brown and Malcolm Sawyer


4.1 INTRODUCTION Chapter 3 discussed the conditions surrounding the launch of the euro and explored the fiscal arrangements accompanying the euro in the light of these. This chapter turns first to consideration of the ECB and monetary policy. Subsequently, the focus broadens out in order to consider the differing financial and monetary institutions of the 11 EMU countries and, finally, the possibility of financial crisis in the face of the unfettered and unprecedented capital mobility unleashed by the euro. 4.2 MONETARY AND FINANCIAL INSTITUTIONAL ARRANGEMENTS The institutional policy framework within which the euro has been introduced and will operate has three key elements which relate directly to monetary and financial policy. First, the ECB is the only effective federal economic institution. The ECB has the one policy instrument of the rate of interest (the ‘repo’ rate) to pursue the main objective of low inflation. The Governing Council of the ECB agreed on the main features of their stability-oriented policy strategy (EC, 1998). The single monetary policy will have a euro area-wide perspective. The president of the ECB at a press conference on 13 October 1998, clearly stated that monetary policy ‘will not react to specific regional or national developments’. A quantitative definition of price stability was adopted: the annual increase in the Harmonised Index of Consumer Prices (HICP) for the euro area should be less than 2 per cent. This is to be achieved through the policy weapon of the rate of interest, and by announced quantitative reference values for...

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