DP2956 The European Contribution to International Financial Stability

Author(s): Richard Portes

Publication Date: September 2001

Keyword(s): euro , EMU , financial stability , liquidity crises , international currencies

JEL(s): F02 , F33 , F36 , G18

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2956.asp

This Paper considers how the European Union, and more specifically the euro area, can contribute to international financial stability. It sets the issues in the broader framework of financial globalization and international capital mobility. Sections 1-3 discuss globalization, international financial stability, and current threats to it – notably, potential crises in key emerging market countries and a possible ‘hard landing’ for the US dollar. In that context, EMU has clearly increased internal stability in the euro area and has promoted a dynamic development of capital markets. But in some respects, monetary union may have exacerbated systemic risks. Section 4 discusses financial supervision and regulation and procedures for dealing with liquidity crises. Section 5 turns to issues raised by EU enlargement. Section 6 considers aspects of EMU and the international financial system that relate to international financial stability. It stresses the need for coherent European positions on exchange-rate policy, the international financial architecture, and the euro as an international currency.