CHAPTER 24: GERMANY’S ROLE IN THE EUROPEAN MONETARY UNION
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17 Apr 2012
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CHAPTER 24: GERMANY’S ROLE IN THE EUROPEAN MONETARY
UNION
Under the ERM, each currency had to fix its value against a single
basket of currencies.
The Performance of the EMS
• The system offered the stability they wanted, without locking
them in permanently
• The common currency relied heavily on the DM, allowing
Germany’s central bank to set an independent policy
• Gave the countries stability, and enough freedom to pursue
their own macro-policy goals
Deciding on the Next Step: Monetary Union
• Risk in currency instability would be eliminated
• Transaction costs associated with economic activity among
the member states would be reduced
• Stages of the Move
o A period in which the last national capital controls were
removed
o The members would coordinate their macro-policies
o An EU wide central bank would be created, a new
common currency introduced and coordinated fiscal
policies followed
The Goals of Monetary Union
• Monetary unification eliminates the costs of currency
conversion
• German leadership of the new monetary union
o Independence has been a good indicator of a central
bank’s stand against inflation
• Monetary union can be seen as an important element in the
process of economically binding the European States together
in order to achieve these broader aims
Germany’s Bargaining Position and the Process of EMU
• Most problematic point in negotiations concerning EMU was
the process to be employed
• Germany wanted to force policy convergence before union
o States prove their ability and willingness
o Must make the commitment to low inflation and tight
monetary supply
• How members would be admitted
o Required existing members to vote unanimously in
favour of admission
o A qualified majority of the existing members approved
admission
• How to discipline