An exchange-rate regime for the euro

Abstract:

Despite efforts in the EMU IGC to keep authority for the exchange rate in the hands of ministers, it was in the event substantially passed to the ECB, along with responsibility for monetary policy. As a result the ECB acquired exclusive control of the only instruments available for influencing the exchange rate in liberalized market economies - key short-term interest rates and exchange-market intervention - and considerable hurdles were put in the way of governments exercising their traditional power over exchange-rate policy. In the event the euro has been worryingly unstable since its launch, and the instability seems likely to persist. This is an unsatisfactory situation that should be remedied, provided it can be done without sacrificing price stability. This paper recalls the relevant treaty rules and how they have been interpreted; assesses the variability of the euro and its predecessors over the past quarter-century; suggests what regime changes would be needed for a policy of euro stabilization; and recommends moving in that direction. In doing so the paper addresses important questions of economic governance in EMU.