The signing of the Maastricht Treaty marked an important shift in European monetary arrangements. While discussion of a single currency in Western Europe was certainly not new even in official circles (the Werner Report in 1970 also presented a path for moving to a single currency), none of the earlier plans had been agreed by the relevant national governments. By providing a specific path to European Monetary Union (EMU), the Maastricht Treaty moved the discussion of a single European currency from the theoretical to the practical.

In Discussion Paper No. 1188, Research Associate Tamim Bayoumi focuses on two issues: first, which countries might benefit from entry into EMU before the millennium; and second, which exchange rate policies are best designed to move countries with individual national currencies to currency union. To answer the first question, the paper provides a brief overview of the existing evidence. It concludes that Austria, Germany, France and the Benelux countries are better placed to join a currency union than the remaining countries in the EU. Whether entry into EMU would provide net economic benefits for all members of the EU, for only the core countries, or for no countries at all is still an open question, however. The reason for this is that knowledge of the benefits from EMU, which are an essential part of any assessment of the economic value of membership, is too uncertain to provide the required level of precision. For the second issue, how to avoid exchange rate instability in the transition to EMU, experience from earlier exchange rate regimes suggests that an early announcement of the parities at which different currencies would enter EMU could reduce such instability if governments were willing to accept the required limitations on domestic policies.

Who Needs Bands? Exchange Rate Policy Before EMU
Tamim Bayoumi

Discussion Paper No. 1188, May 1995 (IM)