Implications of closer international monetary co-operation for the evolution of the European Monetary System

Abstract

For the first time since the collapse of the Bretton Woods system a consensus appears to be emerging among the main industrial countries that exchange rate relationships need to be taken into account more explicitly in the formulation of national economic policies. This shift in attitude has nourished hopes of an agreement on closer international monetary co-operation involving the world’s principal currencies. It is the purpose of this paper to assess, in a somewhat cursory fashion, the possible implications of such an arrangement for the operation of the European Monetary System (EMS) and the longer-run process of financial and economic integration in Europe. As the features of any possible arrangement remain unknown, it is postulated in the second section of the paper that the three major industrial countries, the United States, Japan and Germany, conclude an informal agreement to coordinate their monetary policies with a view to reducing exchange rate instability. The third section argues that the immediate effect of such an arrangement as regards the EMS countries would be to establish a framework for a common policy vis-a-vis third currencies, thereby necessitating greater convergence and co-ordination of policies among the EMS countries themselves. The two subsequent sections then take a look at the opportunities which international monetary co-operation may offer for the development of the ECU: the possibility of promoting wider use of the official ECU is dealt with in the fourth section and questions relating to increasing use of the private ECU are discussed in the fifth section. A final section attempts to draw together the main conclusions.