Abstract
We shall now try to explain with some precision the conceptions which have prevailed up to now in the past and present efforts toward ‘the monetary integration of Europe’.1 We shall not get into a detailed history, or a recital of the long series of negociations, proclamations, decisions and stalemates on this subject which marked the sixties and seventies, and we shall focus on the main characteristics of the European Monetary System.
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References
Part of this chapter is taken from two articles which I have published: ‘Quel systéme monetaire pour l’Europe?’, Banque, December 1978; and ‘Les techniques d’intervention de la zone monétaire européenne,’ Eurépargne, 1979–2. I want to thank Niels Thygesen, Professor at the University of Copenhagen, for the very useful comments he made on a previous version of the present chapter.
Of course, it is only in Figure 1-b that one can have the visual image of the ‘snake’, but Figures 1-a and 1-b reflect exactly the same economic reality. Remember that the term ‘snake’ was originally used during the period of the dollar standard, and that the parity of European currencies was therefore expressed in dollars, i.e., in relation to a third currency as shown here in Figure 1-b. Moreover, the fact that there were then fixed exchange rates - with a margin of fluctuation - between the European currencies and the dollar implied that the snake could not move out of its fluctuation limits, determined in relation to the dollar parity, whence the expression ‘snake in the tunnel’. This effect is illustrated in Figure 2, where a third currency serves as a reference and participates in the system of fluctuating margins.
Graphically, this is shown by the fact that the DM — franc rate may not move beyond the limits TT in Figure 1-a, or that the width of the snake may not exceed by more than 2 per cent the reference parities in Figure 1-b.
It may be argued that, under the European Monetary System established in 1978, these questions will be settled indirectly or on an ad hoc basis by ‘consultations’ among the authorities within the framework of European monetary ‘cooperation’. Personally, I fear that this bureaucratic process, which has been given the promising name of ‘cooperation’, can only end in failure, unlike a real system of institutional rules.
The European ‘legislators’ can make this connection voluntary or involuntary. It would seem to me more sensible to separate the different problems and to seek for each of them an appropriate solution not in contradiction with other objectives.
When one deals with the exchange rates of pairs of currencies in such a bilateral system there is no problem about what currencies to intervene in; it is just a case of which central bank ought to intervene and to adopt adjustment policies. The ‘basket’ system, on the contrary, leads to just the opposite result.
Even though it was clear which currencies were involved.
References
Bank of France, Direction Générale des Services Étrangers, Service des Relation Internationales, ‘Le système monétaire européen’. This text must have been consideres particularly good, as it was published in the March 1979 issue of the Bulletin trimestriel de la Banque de France; in Information Note No. 40 (May 1979’) of the Information Service of the Bank of France; and was reprinted in Problémes Économiques, issue of June 27, 1979.
It might be mentioned in passing that statesmen usually choose experts from their own school of thought.
I shall recall below why exchange rates are tied to inflation rates, but not to real variables such as growth rates.
See section 2 of this chapter.
There is ample recent literature in this field, but it seems to be overlooked by public policymakers, who have taken decision contrary to the teaching if this literature.
Although the theory of purchasing power parity may be valid in the medium to long term, many other variables–interest rates, for example–play an important short-term role.
This is not always so, and does not refer, for instance, to someone like Otmar Emminger in Germany.
This is one of the lesson of monetary approach to the balance of payments. See, for example, J. A. Frenkel and H. G. Johnson, eds., The Monetary Approach to the Balance of Payments, Allen and Unwin, London, 1976;
R. A. Mundell, Monetary Theory, Goodyear, Pacific Palisades, 1971
This conversation can be accomplished by means of a transfer of E.M.C.F. ecu credits from one central bank to another.
The wide fluctuation in the value — in the terms of a given national currency — of a European composite currency like the ecu has been confirmed by the simulated calculations presented in chapter III of the OPTICA 76 report, entitled ‘Inflation and Exchange Rates: Empiric Aspects and Proposition of Political Economy in the European Community’, a report of expert prepared for thr Commission of the European Communities (II/855/76) by G. Basevi, P. Salin, H. E. Scharrer, N. Thygesen and P. de Grauwe
The Treaty of the European Economic Community stipulates in very clear terms that no obstacle to competition to be allowed in Europe. The following are the most pertinent articles.
Article 37.1. Member States shall progressively adjust any State monopolies of a commercial character …
Article 85.1. The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market …
Article 86. Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States …
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© 1984 Martinus Nijhoff Publishers, The Hague, Boston, Lancaster
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Salin, P. (1984). The European Monetary System. In: Salin, P. (eds) Currency Competition and Monetary Union. Financial and Monetary Policy Studies, vol 8. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-6077-0_7
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