TOWARDS MONETARY UNION IN EUROPE - REFORMS OF THE EMS IN THE PERSPECTIVE OF MONETARY UNION

This article reviews a number of options to reform the EMS in the light of the currency turmoil of 1992-3. While greater flexibility - wide fluctuations margins and frequent small realignments - may now seem attractive to some countries, notably the United Kingdom, steps in this direction are likely to lead to increased instability and divergence while postponing for a long time advances towards monetary union. If anything, the fluctuation margins and the Basle-Nyborg Agreement of 1987 providing mechanisms for the short-term defence of exchange rates, need to be tightened up. The article also discusses the scope for strengthening monetary co-ordination in the European Monetary Institute which is to start on 1 January 1994, respecting the principle that monetary sovereignty should remain ultimately in national hands until the start of fall monetary union and the set-up of the European Central Bank. Over the weekend of 31 July-1 August 1993, the EC monetary authorities found themselves unable to defend the existing EMS against the strong speculative pressures on several currencies and they agreed as a last resort to widen fluctuation margins to +/-15 per cent. The central rates were preserved. Although this step marks a clear step in the opposite direction of what is recommended in the present article - prepared about two months before the dramatic developments - the author has chosen to make only minimal factual corrections to the analysis and proposals in the belief that the issues addressed under the heading of reforms in the EMS will have to be faced sooner or later, if Member States wish to revive the EMU process.