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Edited by
William S. Haraf and Thomas D. Willett


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Library of Congress Cataloging-in-Publication Data
Monetary policy for a volatile global economy / William S. Haraf and
Thomas D. Willett, editors,
p. cm.
Includes bibliographical references.
ISBN 0-8447-3713-5 (alk. paper)
1. Monetary policy— United States. 2. International finance.
I. Haraf, William S. II. Willett, Thomas D.
HG540.M655 1990
332.4'973— dc20
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10 8 6 4 2

AEI Studies 503
© 1990 by the American Enterprise Institute for Public Policy Research,
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Printed in the United States of America

The International Monetary System,
the European Monetary System,
and a Single European Currency
in a Single European Market
Gottfried Haberler

The international monetary system is still one of widespread, loosely
managed floating, although it has come under increasing criticism.
The criticism has been especially severe in Europe, leading to the
formation of the European Monetary System (EMS) in 1979. The EMS,
a Bretton W oods-type of arrangement of stable but adjustable ex­
change rates, has seven members: Belgium, Denmark, France, Ger­
many, Ireland, Italy, and the Netherlands. Britain is conspicuously
absent, and Greece, Portugal, and Spain are not yet ready to join.
In 1987 and 1988 two landmark agreements were reached by the
European Community (EC), which are binding for all its twelve mem­
bers. The so-called Single European Act of 1987 provides that by the
end of 1992 all remaining restrictions on trade between EC members
must be removed. In 1988 it was agreed that by mid-1990 all restric­
tions on capital flows must be phased out. In other words, the curren­
cies of the EC countries will become fully and freely convertible.
(Greece, Ireland, Portugal, and Spain can delay compliance until
It stands to reason that this has far-reaching monetary implica­
tions, especially for the members of the EMS, for stable exchange
rates and free convertibility of currencies require as a minimum very
tight coordination of monetary policy.
This is an abbreviated version of the essay that appeared in English in a volume of
essays, Geldioertsicherung und Wirtschaftsstabilitat, in honor of Professor Helmut
Schlesinger, vice president of the German Bundesbank, edited by Norbert Bub, Dieter
Duwendag, and Rudolf Richter (Frankfurt am Main, West Germany: Fritz Knapp
Verlag, 1989).



No decision has yet been made on how to handle the monetary
problems posed by free mobility of capital. A radical solution that has
generated much attention in the media and that France supports but
not Britain is to create a European central bank that would issue a
single European currency. At the Hanover EC Summit in June 1988 a
high-level committee of the governors of the central banks, chaired by
Jacques Delors, chairman of the European Commission, was set up to
make concrete proposals.
The sections in this chapter deal with the problem of fixed ex­
change rates versus floating, trade liberalization in the EC, the EMS,
and the problem posed by free capital flows.
Fixed or Floating Exchange Rates?
In the past few years the present system of loosely managed floating
has again come under sharp criticism.1 On February 19, 1988, a blast
came from an unexpected source. None less than His Holiness, Pope
John Paul II in his encyclical "The Social Concerns of the Church"
("Sollicitudo Rei Socialis ) said: "The world monetary financial system
is marked by an excessive fluctuation of exchange rates and interest
rates, to the detriment of the balance of payments and the debt
situation of the poorer countries." Naturally, the pope did not make
concrete proposals for change. The encyclical says, "The Church does
not have technical solutions to offer." Still, the pope's statement has
been widely interpreted as a rejection of the present system of float­
ing exchange rates. The gold bugs in the Wall Street Journal, for
example, were delighted. They spent several days "observing the
performance of some of the world's notable economic thinkers" and
awarded a silver medal to the pope. A gold medal went to Edouard
Balladur, the French minister of finance.
French governments, both President Mitterrand's Socialist and
Prime Minister Jacques Chirac's conservative, have urged a return to
some sort of fixed exchanges.2 Balladur has spelled out the French
position on several occasions, for example, in his article "Rebuilding
an International Monetary System: Three Possible Approaches."3
In his Wall Street Journal article Balladur mentions several alleged
failures of floating exchange rates to achieve expected results: never
have international balances been so large, nor fluctuations of these
imbalances so wide, and so forth, as during the period of floating
exchange rates. Although I could go through the list of alleged fail­
ures and show that what happened was not the consequence of
floating, I shall not take the time to do so, because this criticism of
floating falls to the ground if we consider the nature of the proposed



alternatives to floating and what would have happened if any one of
them had been in force in the 1980s.
The suggested alternatives for floating are variants of the Bretton
Woods system of "stable but adjustable exchange rates," embellished
by target zones and guided—or misguided—by commodity price
indexes, including the price of gold. There is no reason to assume that
a Bretton W oods-type of system would have functioned better in the
1980s than it did in the 1960s and 1970s. On the contrary, it is easy to
see that it would have broken down just as it did in the early 1970s.
In 1982 the U.S. economy took off on a vigorous, noninflationary
expansion. Foreign capital from Europe and other countries poured
into the United States, the dollar soared, and a large trade deficit
developed. The expanding U.S. economy pulled the world economy
out of the recession.
Now consider what would have happened if in that situation the
world economy had been in a straitjacket of fixed exchange rates.
Europe would have come under severe deflationary pressure, and
any fixed-rate system, with or without a target zone, would have
collapsed. The response would have been imposition of controls, and
the world economy probably would have been plunged into a reces­
The Achilles' heel of the system of stable but adjustable exchange
rates a la Bretton Woods is its vulnerability to destabilizing specula­
tion. Very briefly, if under that system a currency weakens and the
country loses reserves, the speculators (market participants) know
that the currency can only go down; it cannot go up. Furthermore,
they have learned from experience that a devaluation is bound to be
large, because the authorities want to make sure that they will not
have to go through the painful operation again soon. Therefore, if the
speculators have guessed correctly and the currency is devalued, they
make a large profit. If they have misguessed, they merely lose trans­
action costs.
Under floating, the situation is different. A currency under pres­
sure goes down immediately. Therefore, the speculators can never be
sure whether the market has not already overshot and the currency
will go up again. In other words, under fixed exchange rates spec­
ulators speculate against the central banks whose hands are tied.
Under floating, speculators speculate against each other, which ob­
viously is much more risky.
Up to 1914 exchange rates of the major industrial countries were
credibly fixed under the gold standard, which therefore was not so
vulnerable to destabilizing speculation as a Bretton W oods-type of
system. Still, it is hardly necessary to argue at length why a return to



the gold standard is out of the question. Suffice it to ask the question,
Who would want to entrust the course of the world price level and,
therefore, the economic stability of the Western world to the mercy of
Soviet Russia and South Africa, the dominant producers of gold?
Of course, this does not settle the question of floating versus
fixed rates. I believe that floating should continue, but I do not want to
exaggerate the case for floating. In a sense, floating is merely a second
best: if any two countries of any group of countries agree to fix the
exchange rates of their currencies, it would be the best solution—
provided that two conditions are fulfilled. First, currencies are fully
convertible in free markets; in other words, there is no exchange
control, either open or disguised, as, for example, import restrictions
on balance-of-payments grounds. Surely, fixed rates propped up by a
battery of controls is the worst system. Second, the fixed rate must
not impose heavy unemployment or inflation on any participating
Unfortunately, those conditions are only rarely met in the pres­
ent-day world. The European Common Market and the EMS are no
exceptions. Some real exceptions can be found among the many
countries that peg their currency to the dollar, the yen, or the German
mark, like Austria. The Austrian schilling has been pegged to the
prestigious D-mark. True, Austria still has some controls on capital
flows. The controls are mild, however, and if the links to the D-mark
were broken, the confidence of the people in the schilling would
suffer, and the controls would be tightened.
All this was different under the gold standard before 1914. For
one thing, exchange control was unknown; and for another, wages
were more flexible than they are now, and the tolerance for unem­
ployment greater than now. In passing, it might be mentioned that if
wages and prices were perfectly flexible, the whole problem of fixed
versus flexible exchange rates would disappear.
In a few cases the failure to change the exchange rate or to float
caused great damage. In the 1920s the British pound was grossly
overvalued, because it had been restabilized at the prewar parity with
gold and the dollar. As a consequence, the British economy was
sharply depressed throughout the 1920s. John Maynard Keynes crit­
icized the policy in his famous pamphlet The Economic Consequences of
Mr. Churchill, Churchill being chancellor at the time. In 1931 the
pound was cut loose from gold and depreciated, taking along the
currencies of many countries—Australia, New Zealand, and Canada
among them. The Federal Reserve reacted by tightening money—in
the midst of a severe depression! Continental European countries
were hit hard; they, too, tightened money and imposed all sorts of



controls on trade and payments. The case of Germany deserves spe­
cial mention, because sharply rising unemployment helped Hitler
come to power. France, Switzerland, Belgium, Holland, and Poland,
the "gold bloc," suffered a second deflationary shock when two years
later (1933-1934) the dollar was devalued vis-a-vis gold.
Developments after World War II were infinitely better than in
the interwar period. Bretton Woods was a great improvement over the
gold standard. For about twenty years it served the Western world
well by permitting realignments of exchange rates. Late in the 1960s,
however, trouble arose, and the Bretton Woods agreement collapsed
in the early 1970s and was replaced by widespread managed floating.
The reasons for the troubles and collapse of Bretton Woods are
briefly these. In the late 1960s the U.S. dollar lost its position of
unquestioned dominance because of two developments. First, infla­
tion rose in the United States when President Johnson financed the
increasing cost of the war in Vietnam and the equally costly Great
Society programs at home by bank credit rather than by taxes, and,
second, rivals to the dollar emerged: the German mark and the
Japanese yen (not to mention the currency of tiny Switzerland, that
island of democracy and prosperity that survived unscathed two
world wars and the Great Depression).
A fact of crucial importance is that the interdependence of finan­
cial markets in the Western world has sharply increased and that
capital flows across national boundaries have become very large. This
situation has accentuated the vulnerability to destabilizing speculation
of the Bretton Woods system of stable but adjustable exchange rates.
Thus when the dollar came under pressure in the 1960s and gold
flowed out of the country— the dollar was still convertible into gold
for foreign central banks—more and more investors at home and
abroad concluded that sooner or later the dollar would be devalued.
Foreign central banks had to buy billions of dollars to hold the line. In
August 1971 President Nixon closed the gold window, imposing a 10
percent import surcharge to induce other countries to upvalue their
currencies. This was achieved in December 1971, resulting in a de­
preciation of the dollar of about 8 percent against the major foreign
Although calm returned to the foreign exchange markets, it did
not last very long. In mid-1972 the dollar weakened again, and foreign
central banks had to buy billions of dollars to hold the line. The end
came with dramatic suddenness: on January 23, 1973, the Swiss
National Bank stopped buying dollars and let the franc float up. A
flood of dollars swept into Germany. During the period February 5 -9 ,
1973, the Bundesbank bought $5 billion and then gave up. This was



the end of stable but adjustable exchange rates, although the system
of floating exchange rates was legalized only three years later by the
second amendment of The Articles of Agreement of the International
Monetary Fund.
For countries like Germany and Switzerland that did not want to
inflate along with the United States, the only effective and efficient
method is to let their currencies float. The Bretton Woods method, a
one-shot appreciation of their currencies, would be a decidedly in­
ferior approach. The reason is that neither economists nor ministers of
finance or central bankers know what the equilibrium exchange rate
is. This has been amply demonstrated in the past two years when the
question arose over whether the dollar had declined enough to elimi­
nate or sharply reduce the U.S. trade deficit. Time and again ministers
of finance and governors of the central banks of the Group of Seven
(G-7) declared that exchange rates were just about right, only to be
contradicted a few months later by a further decline of the dollar.
Economists, too, were by no means unanimous in their judgment.
Policy makers, however, are becoming aware of their ignorance. Thus,
Noburu Takeshita, prime minister of Japan, when asked whether the
dollar-yen rate was right answered: "Only God knows."
Countries like Germany and Switzerland, on the one hand, that
have to appreciate their currency have a strong incentive to appreciate
too little rather than too much, because they do not want to run the
risk of turning their trade surplus into a deficit. On the other hand,
deficit countries have a strong incentive to depreciate their currency
too much rather than too little, because they want to be sure that they
will not have to go through the same painful process again soon.
It stands to reason that this state of affairs is unlikely to bring
about a smooth adjustment of existing imbalances. Floating is a much
better method, which amounts to saying that markets do a better job
setting exchange rates than governments. Critics of floating point to
what they call excessive volatility of exchange rates under floating.
The answer is, first, that a large part of volatility has been caused by
policy changes: the "open mouth policy"—that is, official statements
that the dollar was too high or too low or just right—was not condu­
cive to calming the market. Second, some of the changes called
"excessive" were quite rational; for example, the sharp rise of the
dollar after the election of Ronald Reagan was beneficial because the
large U.S. trade deficit that developed pulled the world economy out
of the recession. Third, it cannot be denied that the market sometimes
makes mistakes; there are such things as speculative bubbles. Com­
petitive markets, however, sooner or later correct themselves. Thus
with the benefit of hindsight we can say that in 1984 the rise of the



dollar went too far. Then in February 1985 the dollar turned around
and started to decline. It is important to realize that market forces
brought about the turnaround; more and more investors came to the
conclusion that the dollar had risen too far.
Now if we compare the performance of the market with that of
the government, we see that it is in the nature of the political process
that governments are slow admitting mistakes and even slower cor­
recting them. The U.S. budget policy is a perfect example. In the early
1980s the large budget deficits were highly beneficial because they
pulled the U.S. economy out of the recession. There is almost general
agreement, though, that deficit spending has gone much too far. With
the trade balance now on the mend, with export- and import-compet­
ing industries booming, and with the economy operating close to full
capacity, it is imperative to cut spending elsewhere to prevent infla­
tion and recession. What is urgently needed is a credible program to
phase out the structural budget deficit over a period of, say, four
years. No solution of the budget problem can be expected before
The conclusion I draw from all this is that floating should con­
tinue. I repeat, however, that if two or more countries can agree to fix
the exchange rate between their currencies, it would be the best
solution, provided it can be done without imposing tight controls on
trade and payments and without inflicting unemployment or inflation
on any participating country. Unfortunately, these conditions are
rarely met in the present-day world.
Liberalization of Trade in the EC
As mentioned, the Single European Act of 1987 provides that all
remaining restrictions of trade between the twelve members of the EC
must be removed by the end of 1992. The language used in official
and unofficial statements about the task ahead— "to open up the
European markets" or "to create a single European market"—clearly
indicates how unfree and fragmented the Common Market still is.
Customs inspection on the borders between the EC members is still in
force, because indirect taxes have not been unified. This is not the
whole reason, however; there exists a host of regulations on specific
products and industries that differ from country to country and so
restrict free trade and free competition in the EC, as well as imports
and competition from the outside world. There are, for example,
numerous health and safety regulations for trucks, all sorts of indus­
trial machinery, and other products that differ greatly from country to
country. These regulations have a strong anticompetitive effect be­



cause they restrain the operation of hundreds of small and mediumsize companies. The big multinationals, such as IBM and Phillips, are
less affected because they have branches in several countries. The
European Commission in Brussels has been trying to harmonize
regulation in certain areas. This is a very difficult and time-consuming
process, and it is by no means certain that it will be completed in 1992.
Perhaps the process of harmonization does not need to be finished
completely to permit elimination or at least drastic simplification of
customs inspection inside the EC.
The European Monetary System
The EMS is a Bretton W oods-type of arrangement of stable but
adjustable exchange rates. On the whole it has been well received in
official and financial circles in Europe and elsewhere. This is not
surprising. For one thing, it has a natural constituency in the nu­
merous officials and economists who have been involved in setting up
and running the EMS and understandably take great pride in their
creation. For another thing, the predictions of some early critics that
the EMS would lead to high inflation and breakdown were not borne
out by the facts.
The EMS, however, has been erroneously credited with certain
improvements in the participating countries, for example, the decline
of inflation. As Professor Fratianni4 has pointed out, however, the
relevant question is whether the EMS countries have performed bet­
ter or worse than non-EMS countries since 1979. Actually, non-EMS
industrial countries on the average have done as well or perhaps
better than the EMS countries.
It has been argued that the EMS had an anti-inflationary effect
because the more inflationary members, especially France and Italy,
have been forced to curb inflation in order not to get too far out of line
with low-inflation Germany. There is some truth in that. It is generally
recognized that the EMS, contrary to the intentions of its founders,
has become a hegemonic system; Germany, by virtue of the large size
of its economy and its low inflation rate, has become the leader. This
is highlighted by the open chafing of the French at the stern rule of
the Bundesbank. The motive of the present center-left French govern­
ment's renewed attempt to persuade Britain to join the EMS is surely
to make the EMS more democratic and so to curb the power of the
Can the EMS, then, be credited with having had a beneficial
disciplinary effect by linking the currencies to the D-mark? Not really:
for in the absence of an EMS, there would still be a strong economic



inducement for the EMS countries to follow the Austrian example of
pegging their currencies, formally or informally, to the D-mark. It will
perhaps be argued that for France, and possibly for Italy, formally
pegging its currency to the D-mark would be politically unacceptable.
We need not go into that, however, because the whole picture has
been profoundly changed by the decision of the EC to phase out all
control of capital flows by mid-1990.
The EC and the EMS without Exchange Control
For the following discussion it should be kept in mind that only seven
of the twelve EC countries are in the EMS and that dismantling
controls applies to all twelve EC countries, although four countries—
Greece, Portugal, Spain, and Ireland—have been granted two more
years (until 1992) to dismantle controls.
Because the EMS is a Bretton W oods-type of stable but adjustable
exchange rates, it follows that the EMS is just as vulnerable as Bretton
Woods was to destabilizing speculative capital flows. Actually, there
have been several realignments of exchange rates, mostly devalua­
tions against the D-mark. Not much has been heard of large capital
flows preceding or accompanying exchange rate changes, however.
The reason is that in several important EMS countries—France, Italy,
and Belgium— controls are tight and comprehensive enough to pre­
vent large capital flows. It is very important to understand, though
often overlooked by policy makers, that in practice it is very difficult
to distinguish capital from current transactions. Policy administrators
know that the restrictions on capital flows are very difficult to enforce,
because there are many ways to camouflage capital transactions as
current transactions, for instance, by overinvoicing inputs or under­
invoicing exports. The longer the controls last, the more adept in­
vestors (speculators) become in evading the controls. As a result,
capital control always degenerates into more or less comprehensive
exchange control.
This clearly is a most unsatisfactory state of affairs. It is, there­
fore, not surprising that the EC has decided to phase out capital
controls by mid-1990. If the decision is carried out, 1990 will be a
watershed, because with free capital mobility (absence of controls)
any Bretton W oods-type of system of stable but adjustable exchange
rates, such as the present EMS, becomes unworkable. As we have
seen, such systems are very vulnerable to destabilizing capital flows.
If a currency, say the French franc, comes under pressure, investors
know that the currency will go down; and thus there will be a



stampede out of the franc. This is the problem the EC faced up to the
Hanover Summit in June 1988.
I will not try to describe how the Hanover decision was reached.
Suffice it to say that the Hanover meeting seems to have been domi­
nated by a radical solution of the problem: the creation of a European
central bank that would issue a single European money. This proposal
was rejected by British Prime Minister Margaret Thatcher, resulting in
the creation of a high-level committee of the governors of the central
banks, the general manager of the Bank for International Settlements
(BIS), Alexandre Lamfalussy, and two other experts. This Committee
of Seventeen under the chairmanship of Jacques Delors, president of
the European Commission, will make concrete proposals in a year.6
Following the example of Tommaso Padoa-Schioppa who in a
much-quoted paper speaks of the "inconsistent quartet," we can
formulate the problem as that of an "inconsistent tercet": one cannot
have at the same time (1) full mobility of capital; (2) stable exchange
rates; and (3) national autonomy in the conduct of monetary policy.7
I now discuss some policy options that could remove the incon­
sistency. The first that comes to mind and is often mentioned is more
frequent realignments of exchange rates. The question is, how fre­
quent? The answer is that to overcome the basic weakness of the
adjustable peg— that is, vulnerability to speculation—the realignment
would have to be made in small steps at high frequency. This would
be equivalent to floating exchange rates, the economically best and
administratively easiest solution. In the long run, it can be replaced by
the radical solution of a single European currency—if and when it
comes to pass. Holding out that hope would make floating more
Another possibility can be described as a gold standard without
gold. Under the gold standard exchange rates are credibly fixed; the
standard is, therefore, not vulnerable to destabilizing speculations.
Deficit countries are automatically subjected to monetary contraction;
surplus countries, to monetary expansion.
It would not be too hard to formulate rules for monetary policy
that would replicate the gold standard mechanism under modern
conditions. Would it be politically acceptable? Perhaps it would be if it
sailed under the popular flag of tight policy coordination.
I now come to what I call the radical solution of the problem: the
creation of a European central bank that would issue a single Euro­
pean currency. This idea has not only found the enthusiastic support
of some influential and highly competent voices in the media but also
has been put forth by some high officials.
In the first group I mention two, Samuel Brittan and The Econo­



mist. Brittan has developed the case for a full monetary union in
Europe in several articles in the Financial Times. He summed up his
case by saying that a single European market without a single Euro­
pean currency would be like a house without a foundation. He also
pointed out that phasing out controls on capital flows poses a prob­
lem. His solution is radical—creation of a European central bank—
and he criticizes the British government and especially the prime
minister for dragging their feet and not joining the EMS.
The Economist has been a strong supporter of a European mone­
tary union. In an article "Ecu into Monnet: Some Ideas for the Next
Stage of Europe's Monetary System" (London, March 5-11, 1988), The
Economist reports a proposal made independently by Hans-Dietrich
Genscher, Germany's foreign minister, and Edouard Balladur,
France's finance minister, that the EC should set up a study group on
the creation of a European central bank that should issue a European
currency that would circulate first alongside national currencies and
would later supplant them. The Economist accepts‘the goal but finds
the method of setting up a study group too slow and bureaucratic; it
believes that "the EEC already has the makings of a single currency in
the ecu, whose value is set by a basket of European currencies." The
ecu, which at present is merely an accounting unit—no ecu bank
notes exist— should be turned into real money. The Economist further
suggests that the European currency should be called the Monnet,
which would appeal to intellectuals because of the link to Jean Mon­
net (1888-1979), the eminent French statesman and founding father of
the European Community.
This is, of course, rather fanciful. But the idea of a European
currency is taken quite seriously. The French government is fully
behind it, and so is the German government. Karl Otto Pohl, presi­
dent of the Bundesbank, said that the Bundesbank was not, as is often
suggested, opposed to such a goal. He even offered a name for the
European currency: it could be called the franc-fort, the strong franc.
This would please the French and would also appeal to the Germans
because it sounds like Frankfurt, the hometown of the Bundesbank.8
Pohl spelled out his ideas in the article "A Vision of a European
Central Bank."9 Naturally he thinks that the European central bank
should be as independent of political pressures as the Bundesbank is
and that its policy should be to ensure price stability. Chancellor
Helmut Kohl too has expressed his support for the creation of a
European central bank.
What shall we make of all that? As a long-run goal, the creation of
a European central bank, a single currency in a single free market, is
unexceptional, from both the political and the economic point of view.



As a solution posed by phasing out exchange controls, however, the
situation is different. It is inconceivable that a European central bank
and European currency can be set up by 1990, even if we assume that
radical rejection of such a plan by the British government can be
Suppose the big four—Britain, France, Germany, and Italy—
agree in principle that a Eurobank and a Eurocurrency should be set
up. There will still remain important questions where strongly held
divergent views have to be reconciled. For example, the German view
that the Eurobank should be as independent of political pressure as
the Bundesbank and that its task should be to maintain price stability
will hardly go unchallenged. The conclusion is that the problem
posed by phasing out controls in 1990 must be tackled in 1990 and
cannot be left to be solved by a hypothetical European central bank.



C h a p t e r 6 : In t e r n a t i o n a l M o n e t a r y S y s t e m ,
M o n et a r y Sy s t e m ,
in a

and a


E uro pean

S in g l e E u r o p e a n C u r r e n c y

S in g l e E u r o p e a n M a r k e t

1. A comprehensive discussion of floating exchange rates can be found in
The Merits of Flexible Exchange Rates, Leo Melamed, ed. (Fairfax, Va.: George
Mason University Press, 1988).
2. After this was written, the conservative government of Jacques Chirac
was replaced by a center-left one. But since in the past the Socialist and
conservative governments took a similar stand, the new center-left govern­
ment is not expected to bring change.
3. Edouard Balladur, "Rebuilding an International Monetary System:
Three Possible Approaches," Wall Street Journal, February 23, 1988. For a
detailed critical analysis of Balladur's proposals, see Robert Solomon, "Minis­
ter Balladur on International Monetary Reform," International Economic Letter,
vol. 8, no. 3, March 15, 1988.
4. Michele Fratianni, "The European Monetary System: How Well Has It
Worked?" (Paper presented at the Cato Institute's Sixth Annual Monetary
Conference, February 25, 1988; published in The Cato Journal, vol. 8, no. 2 [Fall
1988]). Fratianni presents an excellent analysis of the operation and achieve­
ments of the EMS, drawing on the extensive literature on the subject. See also
Michele Fratianni, "Europe's Non-Model for Stable World Money," Wall Street
Journal, April 4, 1988. Another thorough description and analysis of the
working of the EMS and a wealth of statistics can be found in Horst Ungerer,
Owen Evans, Thomas Mayer, and Philip Young, "The European Monetary
System: Recent Developments" (Occasional Paper No. 48, International Mon­
etary Fund, Washington, D.C., December 1986).
5. It is not clear, however, why Britain should be tempted to join; it has
done quite well outside the EMS. While once regarded as the sick man of
Europe, in the past five years the British economy has outperformed that of
all other members of the EC; its growth rate has been by far the highest of all
twelve members of the EMS.
6 . For a detailed description of how all this came about, we shall have to
wait for the second edition of Yoichi Funabashi's best seller, Managing the
Dollar: From the Plaza to the Louvre (Washington, D.C.: Institute for Interna­
tional Economics, 1988), which surely will have a part, Managing the European
Monetary Union.
7. See Tommaso Padoa-Schioppa, The EMS: A Long-Term View (Talk given at
the "Conference on the EMS," Perugia, October 16-17, 1987, sponsored by
Banca dTtalia, Centre for Economic Policy Research and Centri Interuniversitario Studi Teorici per la Political Economica, Italy). The author's quartet
contains in addition to the three items mentioned in the text above, free
trade. I leave it out, because some protection on the part of some EMS
countries, though undesirable and in violation of the spirit of the EMS, would
not prevent the functioning of the EMS.
8. See the Financial Times (London), July 15, 1988.
9. Karl Otto Pohl, "A Vision of a European Central Bank," Wall Street Journal
(London), July 15, 1988.