Discussion paper

DP618 From EMS to EMU

This paper discusses the strategic choices involved in the transformation of the current EMS into a European Monetary Union. Alternative strategy proposals are evaluated under the criteria of credibility, flexibility, effective institution-building and mitigation of end games. The Delors strategy mistakes exchange rate fixity for credibility, resulting in an overly rigid and unstable strategy. The Hard Ecu provides flexibility, but is unlikely to achieve EMU. We propose a softened EMS - the Two-Tier EMS - as an alternative that meets the four criteria in a more satisfactory way. The second part develops a principal-agent model of the central bank, which embodies an explanation of political business cycles and the credibility problem. We use this model to show that the current draft of the statutes of the European Central Bank does not solve the dilemma of discretion and credibility in a satisfactory way.


Fratianni, M, J von Hagen and C Waller (1992), ‘DP618 From EMS to EMU‘, CEPR Discussion Paper No. 618. CEPR Press, Paris & London. https://cepr.org/publications/dp618