DP660 Real Exchange Rates Within and Between Currency Areas: How Far Away is EMU?
The renewed quest for a European monetary union raises the question: Is Europe ready for a common currency? We compare the variability and persistence of real exchange rate fluctuations within the German monetary union and between Germany and eight European countries to assess the viability of a monetary union in Europe. The results suggest a `Two-Speed Europe'. A core union comprising Germany and her smaller neighbours is currently viable, but further convergence to reduce real exchange rate variability between these core countries and Denmark, France, Italy, and the United Kingdom is necessary. Alternatively, monetary union should be postponed until further adjustment has occurred. This period of waiting would neither require nor benefit much from further tightening of the current EMS.
