OP:2. The Transition to Monetary Union
Author(s): Alberto Giovannini
Publication Date: April 1990

Abstract: This paper describes a plan for the transition to monetary union in Europe. The Delors Report has served the essential role of providing the broad framework for this transition  but has not specified explicitly how to manage it. Now, however, it is necessary to consider detailed plans: in December 1990 European governments will hold an intergovernmental conference to establish institutions for guiding the transition to and for implementing the monetary union. Discussion of alternative detailed plans will certainly help in designing these institutions and the appropriate changes in the Treaty of Rome.

The plan offered in this paper provides an exact description of the structure and operations of the ESCB (the European System of Central Banks) during stage II and a description of a currency reform preceding the full monetary union, details omitted from the Delors Report. The basic approach advocated in this proposal is to design institutions and their tasks in order to cope effectively with the most important economic problems of this transition: the instability of financial and foreign exchange markets, the likelihood of wide fluctuations in the demand for national currencies, and the adjustment of price setters' expectations of inflation and exchange-rate changes.

The maintained assumption of the paper is that a common currency is a desirable ultimate objective of Europe, since it would bolster and sustain economic and fiscal integration among EC countries. Given the desirability of monetary union, the discussion starts from threats to the EMS arising from the deregulation of financial markets and the appropriate response to these threats. The paper continues with a comparison of two strategies for the transition to a monetary union: gradualism versus a sudden monetary reform. The rest of the paper is devoted to the specifics of the proposed plan and to a discussion of the way in which the plan fits the guidelines of the Delors Report.

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