POLI 243 Lecture Notes - Lecture 21: Economic And Monetary Union Of The European Union, European Central Bank, Currency Union
Germany and European Monetary Union
March 30
Remember: hard money (high value, deflated), soft money (low
value, inflated)
• Mundell Flemming constraints (What do states want?): open capital flows, fixed
exchange rates (stability), domestic monetary policy autonomy
o Variation of preferences from an analytical liberal perspective – bottom-up
approach
Issues for germany concerning monetary union
• Maastricht treaty
• Size and share of the costs of adjustment
o How will everyone adjust to a common set of policies (convergence)
o How much will the germans have to pay to help everyone adjust
o Don’t want to give up domestic practices (low inflation, high liquidity)
• 1st suggestion: build institutions first – central bank, currency – then force compliance
with the rules
• 2nd suggestion: states prove they can comply with the rules and then can join – adhere to
German monetary policy
• Germany's preferences:
o Require unanimity on entrants – essentially german veto
▪ Germany and neighbors with 'hard currency' would have a block of vote,
otherwise countries with inflationary policies (with different preferences)
would join
o Institutions of discipline (European central bank and member countries)
o Willing to make side-payments/incentives, want to make the deal work
▪ 70s 'snake' failed when larger economies left the agreement and Germany
was left with the DM and small economies tied to it
Explaining Germany's Role
• Systemic factors:
o Problem: DM potentially rivalled the dollar (70s and again in the 90s)
▪ Germany achieves monetary goals
▪ Dollar = international currency
▪ 70s issue: US broke the link between the dollar and gold after dissolving
bretton woods. Too much currency in circulation compared to the DM
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