The costs and benefits to the European Community from economic and monetary union (EMU) will inevitably be affected by developments in the rest of the world and also by the reactions of non-Europeans and international institutions.

In Discussion Paper No. 424 Research Fellow George Alogoskoufis and CEPR Director Richard Portes assess the international implications of EMU in the light of the current and prospective state of the international monetary system and the process of policy coordination among the industrial economies.

Alogoskoufis and Portes first consider the possible effects of the establishment of EMU on international monetary institutions, and they suggest that the major impacts are likely to be felt in the increased bargaining power of the Europeans in monetary negotiations at the G7 meetings and annual summits of finance ministers and central bank governors and, to a lesser extent, other economic negotiations.

The authors then concentrate on the analytical issues raised by looking at the potential international role of the ECU as a reserve currency. They note that this will entail no significant costs to Europe, but also that the potential benefits are likely to be small in the short run. In the absence of major disruptions to the world monetary and trading system, the establishment of major international reserve and vehicle currencies is a very slow process. Hence, while the ECU will be a much stronger long-term contender to usurp the dollar's role as the main international reserve and vehicle currency than, say, the Deutschmark, it is unlikely to overthrow the dollar in a `palace coup'. The main benefit from European monetary unification is therefore likely to come from the partial substitution of ECU for dollar reserves in the portfolios of European central banks; the potential costs that might arise from the ECU taking a reserve role outside the Community are unlikely to be realized soon.

Alogoskoufis and Portes then consider exchange rate regimes between the ECU and the other major international currencies in relation to the coordination of monetary and fiscal policies. They argue that the reduction of uncertainty will clearly be beneficial, and that the increased symmetry in the world-wide policy coordination process will increase the need for explicit coordination. EMU is likely to make international coordination of fiscal policy even more difficult, however, and hence to increase the burden on the coordination of monetary policy. Finally, they note that EMU will have a wide range of effects on the politics of economic policy coordination. There are likely to be clear benefits to the Community from its greater `weight' as a single economic player and from its enhanced ability to trade off macroeconomic policy commitments against policies on trade, agriculture and the environment.

International Costs and Benefits From EMU
George Alogoskoufis and Richard Portes

Discussion Paper No. 424, June 1990 (IM)