European Monetary System Research Articles

A choice for Europe, a choice for growth? The Bank of Italy, the Pandolfi Plan and the European Monetary System, 1977-1979

The creation of the European Monetary System (EMS) between 1977 and 1979 introduced an element that would become central to Italy's strategy of adjustment to the macroeconomic shocks of the 1970s: the ‘external constraint', a political device — albeit with a technocratic matrix — designed to reduce public debt and enhance the country's economic competitiveness.Conceived by an economist at the Bank of Italy, Tommaso Padoa-Schioppa, in 1978, the reforms of the ambitious programme known as the Pandolfi Plan were designed to restore the competitiveness of the Italian economy. The plan described the main features of the lira's entry into the EMS as an external constraint, based on indications from the Bank of Italy's Director General Carlo Azeglio Ciampi and despite objections from Governor Paolo Baffi.At that juncture, the Bank of Italy consciously assumed the role of substitute that would characterise its action in the following decade, motivating and orienting the country's political choices in favour of an ever more urgent economic and monetary integration of Europe, towards what would finally be formalised with the Maastricht Treaty. Consistently with the structure of the EMS, the external constraint outlined in the Pandolfi Plan moved towards exchange rate constraints related to public finances and to the phenomena of fiscal dominance typical of monetary policy in Italy; it was essentially transformed into a fiscal policy constraint formally recognised in July 1981, with the so-called divorce between the Bank of Italy and the Treasury. The classic external constraint related to the balance of payments accounts and foreign exchange rates remained unchanged towards the rest of the world, meaning that it had an economic and not a "legal" nature, as defined by Guido Carli in the early 1990s.

The monetary policy trilemma from the perspective of European integration

AbstractFollowing the breakdown of the Bretton Woods agreement the international monetary system has operated based on floating exchange rate arrangements and free capital mobility. A most significant subsequent improvement has been the process of European monetary integration, from the institution of the European Monetary System to the Euro currency. The relationships between the short‐term interest rates of European Union (EU) countries and the United States suggest, that in the post‐Bretton Woods period the US dollar has held an important anchor currency role, while EU countries acquired considerable monetary policy independence. Further, the stronger relationships between the short‐term interest rates of EU countries and Germany may be viewed as a consequence of monetary unification. The econometric evidence provides important insights for the period following the adoption of the Euro, when European economies have in many instances been subject to heterogeneous shocks.

Has Italy Won or Lose in the European Monetary Union

The transformation of the European Monetary System into the European Monetary Union is a significant event in the development of the world economy and a major issue of concern in international financial research. The establishment of the European Monetary Union is the basis and guarantee for the establishment of the European Economic Union and Political Union. In this study, by analyzing various economic indicators of Italy, the author can determine whether it is a winner or loser in terms of gains and losses in the European Monetary Union and then can also infer the changes in the economies of various countries under the union policies. In terms of economic development, it can be seen from the Gini coefficient and GDP growth rate that Italy has long been in a predicament of a large wealth gap and weak economic development. In terms of economic security, it can also be inferred that Italy is trapped in a quagmire of foreign debts and perennial fiscal deficits through the two data of the percentage of foreign debt to GDP and the ratio of fiscal revenue and expenditure, resulting in insufficient amplitude credibility and large economic loopholes. From this, it can be judged that Italy is in the position of a loser in the European Monetary Union.

Dilemmas of Pre-Accession Policy

The functioning of the Bretton Woods System (BWS) and the European Monetary System (EMS) turned out to be a type of lesson for the architects of the European Monetary Union (EMU). I

Lorenzo Natali and the first “tangible” steps towards the EEC Iberian Enlargement

This article claims that the EEC turned the challenge of Iberian enlargement into an opportunity to relaunch the European project. The text focuses on illuminating the under researched role of the European Commission during the presidency of the British Roy Jenkins (1977-1981). The common thread of the story is made up of the analysis of the work carried out by the commissioner for the Enlargement, the Italian Lorenzo Natali. Far from understanding the accession of Spain and Portugal as a problem for the economic cohesion of the EEC, as some member states raised at the time, Natali saw in it a stimulus to overcome the break following the first enlargement. The text shows how, following Natali’s strategy, the Commission linked the progress of the Iberian agenda to the resolution of the great challenges of the community agenda: the establishment of a European monetary system, the completion of the Single Market, the reinforcement of the international role of the EEC and above all a political and institutional reform able to guarantee the Community to work with twelve member-states.

European monetary regimes after the fall of Bretton Woods: a political economy approach

AbstractAfter the fall of the Bretton Woods system, the EU initiated an original path towards monetary integration which led to the establishment of the European monetary system (EMS) in the 1980s and the economic monetary union (EMU) in the 1990s. This path was an alternative to the floating exchange rate regime which many other countries decided to follow. Adopting a political economy approach, in this paper we reconstruct the main phases of this process, from the 1970s up until today, arguing that they cannot be explained only in terms of costs and benefits of alternative exchange rate configuration, but should consider political as well as economic factors—both domestic and international ones—and the interaction between European monetary and real integration. Ultimately, the predominance of political factors led to an underestimation of the economic difficulties generated by the coexistence of irrevocable exchange rates and full capital mobility. We suggest that new policy instruments and institutional changes are needed to make the common currency workable in the long run. The mandatory path should be towards a more deeply integrated Europe. Such integration is essential to enable the European monetary union to confront with future challenges.

ЄВРОПЕЙСЬКА ВАЛЮТНА СИСТЕМА: ПОЗИТИВНІ ТА НЕГАТИВНІ АСПЕКТИ

The development of the state, first of all, depends on the stability of the national and world currency systems, and their international relations. The functioning of the world economy is based on the establishment of an effective currency and monetary system of relations between states, leading to the strengthening of internationalization processes. One of the examples of the prevalence of internationalization processes is the creation of a single currency system within the European Union (EU). This, in turn, ensures the competitiveness of national economies based on an increase in the volume of production of goods and provision of services, making capital investments in the industry. The creation of the European Monetary System (EMS) means the exchange of goods, services, capital, and labor, as well as the establishment of a single monetary and currency policy, ensuring the economically advantageous positions of the member countries of this association on the world market. Therefore, the question arises of distinguishing the positive and negative aspects of the European monetary system, and its influence on the state of the global economy. The article covers the issue of the peculiarities of the formation of the European monetary system. The main purpose of the study is to analyze the features of currency integration in the European Monetary Union in today's conditions. As a result, the following tasks were set: to investigate the characteristic features of the creation of the EMU; to form the goal of creating a researched regional currency union; highlight the main elements of this European currency integration; to analyze the advantages and disadvantages of the formation of the European Monetary System. The work presents the definition of the concept of "currency system", types of currency systems, and their constituent elements. The positive and negative aspects of the European monetary system are singled out, the stages of the introduction of the European Monetary Union are described, its main institutions and their functions are displayed, and statistical data on the percentage of the US dollar and euro in official currency reserves in the world during 1999–2021 are given.

1970·80년대 유럽통합 추동력으로서 독일과 프랑스의 양축

This article aims to explain the importance of French-German cooperation in the process of European integration in the 1970s and 1980s. To this end, this article explains how France and Germany became both pillars of European integration from the December 1969 Hague Summit, the starting point for overcoming the stagnation of European integration in the 1960s, to the signing of the European Single Act in 1986. Chapter II will describe important aspects of French-German cooperation in European integration from the Hague Summit in 1969 to the Paris Summit in 1974. Chapters III and IV will explain the leading role of French-German bilateral ties in European integration in the process of establishing the European Monetary System in 1979 and solving the British Budgetary Question in the early 1980s.

Anti-Inflationary Commitment in the Post-Bretton Woods Era: Italy's Road to Stability-Oriented Monetary Policies, 1975–81

This article focuses on the historical reasons, and the main political implications of Italy's anti-inflationary commitment between the mid-1970s and the early-1980s. This study examines the broader climate of opinion within which Italy's economic and monetary authorities – that is, the Bank of Italy – changed or adapted their main attitudes regarding the existence of high inflation rates throughout the 1970s and early 1980s in accordance with an emergent international (i.e. the European Monetary System) anti-inflationary consensus. This article first explores the main political and social steps of Italy's prioritization of anti-inflationary goals as they were envisaged by the central bank and its governmental interlocutors. Second, it retraces the run-up to the ‘divorce’ between the Bank of Italy and the Treasury in July 1981. Here the ‘divorce’ is conceptualized as a counter-reaction of specific strands of Italy's ruling class (namely those who revolved around the central bank) against the volatility of public finance performances and what was deemed as the seeming elusiveness of Italy's governmental parties regarding the need to restore the country's financial stability. Finally, this article reflects on the historical meaning of Italy's anti-inflationary commitment as part of the global emergence of stability-oriented monetary policies.

Numerical rules or political government, that is the (European) question

Numerical rules can be defined as legal rules, the operative part of which is an economic indicator. This peculiar recombination of the technologies of government through law and governance by numbers is the result of the return of the regulatory ideal of neutral government in the 1970s (powered by the amalgamation of ordoliberal and neoliberal ideas into what may be called neo-ordo-liberalism) and the search for solutions to the contradiction at the heart of European integration after 1971: the will to have a common currency without the will and institutional means to ensure its political government. The ground for the emergence of European numerical rules was laid by the establishment of the European Monetary System in the late 1970s, which resulted in the subjection of national monetary policy (and to a lesser extent, national fiscal policy) to relevant economic constraints. European numerical rules were codified and thus juridified in the Maastricht Treaty, concretised in the Stability and Growth Pact, and retooled in the wake of the financial, economic and fiscal crises of the 2010s. Cumulated experience confirms that the elimination of discretion in the process of application of numerical rules is an illusion. In fact, resort to economic indicators to define the operative part of legal rules does not do away with discretion, but merely changes the way in which discretion is exerted. This is so because economic indicators are not sources of objective and impartial economic knowledge, but social constructs, open indeed to be articulated in different forms. The curious case of the structural deficit as defined in the Stability and Growth Pact illustrates the point quite vividly. The need to resort to discretion in the process of application of numerical rules should be explicitly acknowledged instead of denied. Otherwise, the result will be the cloaking of discretionallty, which breeds arbitrariness.

Imported or home grown? The 1992–3 EMS crisis

Using newly assembled data on foreign exchange market intervention, we construct a daily index of exchange market pressure during the 1992–3 crisis in the European Monetary System, allowing us to pinpoint when and where the crisis was most severe. Our analysis focuses on a neglected factor in the crisis: the role of the weak dollar in intra-EMS tensions. We provide new evidence of the contribution of a falling dollar-Deutschmark exchange rate to pressure on EMS currencies.

7. Blurring boundaries: The economists at the Bank of Italy and the making of the European Monetary System, 1975-1988

À la fin des années 1970, pour faire face aux déséquilibres macroéconomiques, les économistes de la Banque d’Italie conçurent une réponse de grande envergure, centrée sur l’adhésion au Système monétaire européen (SME). Le choix fut le produit d’un double brouillage des frontières qui séparaient la banque centrale et le législateur, d’une part, le gouverneur et les économistes de la banque centrale, d’autre part. Ainsi, la Banque d’Italie acquit un rôle de suppléance vis-à-vis du gouvernement en traçant les contours de la politique économique, ce qui constituait le véritable moteur des stratégies élaborées pour lutter contre l’instabilité croissante. La Banque d’Italie exerça son influence en transcendant son mandat institutionnel, même si cela fut la condition préalable pour fonctionner comme une banque centrale indépendante, ce qui fut reconnu de facto en juillet 1981 en raison du « divorce » vis-à-vis du Trésor. Classification JEL : E58, E52, N14, B22

Latvia’s Monetary Policy during the 2000s

The main purpose of this article is twofold. The first objective is to follow the main trends in the development in the Latvian’s monetary policy and the European Monetary system accession process, with a focus on the local currency stability problems. It discusses the process and strategies for choice of the strategy as well as the main issues that have arisen in the accession process. The second objective of this article is to investigate the on-going monetary policy of the Bank of Latvia, to analyse the basic principles of its operations and influence on national economic growth. Both objectives fully corresponding to the article’s research object, i.e. to a monetary policy of the Bank of Latvia. Regarding the developed countries the general monetary policy objectives deals not only with maintenance of stability of the exchange rate and general price level, but also with stimulation of economic development, growth of employment and incomes of the citizens. The period from 2003 till 2010 is being investigated. We use a wide range of research methods, such as: grouping method, method of comparison of financial ratios and etc.

ПРОБЛЕМИ ТА ПЕРСПЕКТИВИ ПРИЄДНАННЯ УКРАЇНИ ДО ЄВРОПЕЙСЬКОГО ВАЛЮТНОГО СОЮЗУ

The main purpose of the article is the study of current issues of monetary integration of Ukraine into the European Monetary Union. Since Ukraine became a candidate country for joining the European Union on June 23, 2022, a detailed study of the prospects for currency integration has become an extremely urgent issue. This study reveals the main theoretical approaches to the interpretation of the concept of "currency union"; examines the elements on which the European Monetary Union is built; factors affecting integration; and identifies the main problems that block the currency integration of Ukraine, namely the incomplete legal framework and currency exchange rate policy. In the light of these problems, we analyzed the changes that took place in the currency market of Ukraine from the beginning of independence to the beginning of a full-scale war. It is worth noting that every year Ukraine took a number of steps that clearly brought us closer to European standards, but with the beginning of Russia's invasion of the territory of Ukraine, the situation changed significantly: the currency policy changed from liberalization to strict restrictions and control. Such changes were provoked by the beginning of the war and are of a forced nature, because without their introduction it would not be possible to maintain the functioning of the Ukrainian economy at an acceptable level sufficient to ensure the activities of individuals and legal entities, as well as the state's performance of its direct functions, especially the defense function. At the same time, Ukraine continues to strive for integration with the EU, although this is not an easy task in the conditions of martial law. However, it is worth noting that the currency integration of Ukraine with the European Monetary Union is quite promising, at the same time very long-term since this kind of integration takes place only at the highest level of harmonization of currency policies. At the same time, the positive effect for Ukraine consists in ensuring the achievement of both economic and social growth. Also, rapprochement with the EU will help Ukraine to pass the period of post-war reconstruction of the Ukrainian economy and the state more easily in general. Hypothesis. We assumed that with the start of the war, in the short term, the chances of Ukraine joining the European Monetary System would decrease, but in the long term, on the contrary, they would increase. Research methodology. The basis of this scientific research is the work of domestic and foreign scientists who studied the European currency system. At the same time, we used three main methods: analysis, synthesis and systematization. The analysis and systematization made it possible to single out the factors that will contribute to Ukraine's successful accession to the European Monetary Union. The use of a logical method and a systematic approach helped to analyze and summarize the situation on the foreign exchange market of Ukraine, as well as to make generalized recommendations for improving the situation on this market. Findings. This study made it possible to assume that Ukraine's accession to the European Monetary Union is possible, but only in the long term. At the same time, it is worth noting that such integration will have a positive impact on the economy of Ukraine.

Achieving a Shared Consensus: the Delors Committee and the Relaunch of the EMU Process

The Madrid European Council of 26-27 June 1989, where the twelve heads of state of the EEC officially approved the Delors Report and formally launched the EMU process, marked the emergence of a new consensus towards European institutional innovations. This paper, based mainly on previously unseen documents from the Tommaso Padoa-Schioppa personal archives held at the Historical Archives of the European Union, analyses the two-years path that brought to this result. In early 1988, a French and Italian challenge to the European monetary system in place, through the publication of two memorandums, launched an international debate alimented by both national and supranational actors that led to the creation of the Delors Committee in June 1988. Developed from September 1988 to April 1989, its activity made it possible for the EC members to identify and define the fundamental elements of a monetary union and to outline a three-stage path for its realisation.

Can Central Banks circumvent the impossible trinity within their operational frameworks? Theory and evidence

AbstractCentral Bank operational frameworks can be challenged during times of severe financial stress. Typical of such an instance is where policymakers attempt to heavily manage or fix a domestic exchange rate whilst faced with balance of payments pressures. However, it is claimed to be impossible for policymakers to achieve both monetary independence and exchange rate stability if the domestic economy were to post a balance of payment surplus, otherwise known as the ‘impossible trinity’. The purpose of this paper is to investigate the European Monetary System crisis through the lens of Institutional Practice, that is the day‐to‐day operations of key institutions, such as the Central Bank, Treasury and commercial banks, with a view to demonstrate why global imbalances are able to occur and persist across the international monetary system. Through both a theoretical and an empirical appraisal, this paper shows how Central Banks in economies with a balance of payments surplus can circumvent the binding constraints of the trinity within their operational frameworks.

Reshaping the external constraint. Franco Modigliani, Tommaso Padoa-Schioppa and the EMS, 1977-1993

During a decade of stagflation in the 1970s, a sea of changes on the interna-tional stage led to major macroeconomic imbalances that gave central bankers a different role in relation to governments and policy-makers. In Europe, this coin-cided with the relaunching of the project for European integration. The Italian case shows how governments and central bankers interacted in shaping adjustment strategies. The Bank of Italy had a pivotal role in shaping the country's economic policies, relying on its capacity for economic analysis. The adjustment strategy formulated in the "Pandolfi Plan" of 1978 was conceived largely by an economist at the Bank of Italy, Tommaso Padoa-Schioppa. Further developing analyses conducted jointly with Franco Modigliani the previous year, the plan focused on the macroeconomic effects of high labour costs in the wake of a full ("100% and plus") wage indexing and rising government deficits. The policy proposal revolved around a few targets, namely investments and economic growth, and an explicit principle of fairness in the labour market. The Pandolfi Plan pledged to Italy's en-during participation in the European integration process by combining economic development with adhesion to the "European choice", which meant joining the European Monetary System (EMS). The European agreements governing EMS membership replaced the standard external economic constraints, i.e. the balance of payments and exchange rate, with a new kind of semi-legal external constraint ingrained in the governance structure of the European Community. The nature of this new semi-legal external constraint as a fiscal discipline mechanism eventually emerged more clearly with the Maastricht Treaty.

European Monetary System and IMF

European Monetary System and IMF

Imported or Home Grown? The 1992-3 EMS Crisis

Using newly assembled data on foreign exchange market intervention, we construct a daily index of exchange market pressure during the 1992-3 crisis in the European Monetary System. Using this index, we pinpoint when and where the crisis was most severe. Our analysis focuses on a neglected factor in the crisis: the role of the weak dollar in intra-EMS tensions. We provide new evidence of the contribution of a falling dollar-Deutschmark exchange rate to pressure on EMS currencies.

Кризис бреттон-вудской валютной системы и начало европейского валютного сотрудничества

The article aims to identify the impact of the crisis of the Bretton Woods monetary system on the beginning of European monetary cooperation. Russian scholars' publications on European monetary integration usually examine in detail the internal prerequisites for the emergence of the Werner Plan and only sketch the external environment. Drawing on available European and American sources, this research provides a more nuanced picture of the origins of European monetary cooperation in the context of a general collapse of the post-war international monetary order. The article begins with the characteristic of the main features of the Bretton Woods monetary system. In the late 1960s and early 1970s, the intrinsic contradictions of the Bretton Woods mechanism, such as the problem of liquidity, confidence in the key currencies, and the adjustment mechanism, generated numerous monetary crises. All efforts to reform the international monetary system stalled because of disagreements between countries with surplus and deficit payment balances. The research also focuses on the US monetary policy. As the US dollar was the main reserve currency, the stability of the entire monetary system depended on its position. Since the late 1960s, conflicts over monetary issues developed between the United States and Western European countries, culminating in the Nixon administration's unilateral decision to abolish the gold standard in August 1971. Monetary crises and the weakness of the dollar pushed the countries of the European Economic Community to develop their own currency grouping. The article analyses the Werner Plan of 1970 that proposed the creation of an Economic and Monetary Union (EMU) with a single European currency as the ultimate goal. Based on fixed exchange rates between European currencies, the EMU represented a regional replica of the Bretton Woods system. The single European currency was seen by Europeans as an alternative to the dollar and the unpredictable American policy. The author concludes that the end of transatlantic monetary cooperation gave an additional impetus to the development of European monetary integration. Although first European efforts to create the EMU had failed because of the different approaches of France and the Federal Republic of Germany as well as the economic crisis of the early 1970s, the Werner Plan marked a crucial phase in the history of European integration. The Werner Report became a blueprint for the European Monetary System (EMS) of the late 1970s. The success of the EMS paved the way for the creation of the European Monetary Union envisaged in the Maastricht Treaty of 1991 establishing the European Union and the adoption of a single European currency - the euro.