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A currency board for European Monetary Union outsiders

  • European Monetary Union
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Intereconomics

Abstract

It is becoming clear that strict interpretation of the Maastricht criteria and adherence to the 1.1.1999 as the starting date for EMU will lead to a two-speed monetary union with insiders and outsiders. In this case, the author proposes the introduction of a currency board for outsiders in order to ensure a minimum of convergence before these countries join EMU as well as to confront the danger that outsiders may become faced with longer term obstacles to membership. *** DIRECT SUPPORT *** A02GP105 00003

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References

  1. Cf. M. Sutter: Public Indebtedness in a Monetary Union. Comments on the Necessity of its Disciplining and Sanctioning, in: CA-Quarterly I/96, pp. 26–33.

  2. Cf. A. Radü: Fiskalpolitik in einer EG-Währungsunion. Eine Analyse der Interdependenzen, Kooperationsnotwendigkeiten und möglichkeiten, Frankfurt 1994, p. 212.

  3. D. Gros is also in favour of linking unilaterally to EMU the exchange rates of those countries which do not qualify for EMU membership from the start: D. Gros: Zur Sicherung der Währungsunion vor exzessiven Defiziten. Ein Reformvorschlag zum “Verfahren bei einem übermäßigen Defizit”, Geld und Währung Working Papers No. 43, Johann Wolfgang Goethe-Universität, Frankfurt am Main 1995.

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  4. So far, Art. 109k (2) EUT allows for a review of the degree to which the convergence criteria are satisfied in those member states covered by the special arrangement at least every two years or on application.

  5. Cf. S. H. Hanke, L. Jonung and K. Schuler: Russian Currency and Finance. A Currency Board Approach to Reform, London 1993, p. 80 ff.

  6. Cf. K. Osband and D. Villanueva: Independent Currency Authorities. in: IMF Staff Papers, Vol. 40 (1993), pp. 202–216, here p. 205.

  7. W. Fuhrmann: Currency Board versus Zentralbank: Lösung für Übergangsperioden?, mimeo, Innsbruck 1995, p. 4.

  8. This must be valid for the CB’s “issue department” at least, which is strictly responsible for the exchange of domestic currency for the reserve currency. A (small) degree of scope could be granted to the CB's “banking department” which can use any (as a rule very modest) spare foreign reserves for purposes of discretionary monetary policy; cf. A. G. G. Bennett: The Operation of the Estonian Currency Board, in: IMF Staff Papers, Vol. 40 (1993), pp. 451–470, here p. 454.

  9. Thus it was that during Ireland’s currency board years of 1928–1979, the external claims of commercial banks provided a buffer which helped keep the domestic money supply relatively constant, independently of the balance on current account; cf. P. Honohan: Cureency Board or Central Bank? Lessons from the Irish Pound’s Link with Sterling, CEPR Discussion Paper No. 1040, London 1994, p. 19.

  10. However, the buffer effect of commercial banking activities results in costs for the commercial banks of maintaining surplus reserves, which limits their ability to balance out the money supply; cf. M. Krüger: Das Currency Board System, in: WISU, Vol. 23 (1994), pp. 783–785, here p. 784.

  11. Cf. C. M. Buch: Das erste Jahr der Krone—Estlands Erfahrungen mit der Währungsreform, in: Weltwirtschaft 1993, pp. 441–465, here p. 448.

  12. Cf. W. Fuhrmann and R. Richert: Ein Währungssystem mit einem Currency Board, in: WISU, Vol. 24 (1995), pp. 1035–1039, here p. 1038; M. Willms: Internationale Währungspolitik, 2nd edition, Munich 1995, pp. 163 ff.

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  14. Cf. A. Walters and S. H. Hanke: Currency Boards, in: The New Palgrave Dictionary of Money and Finance, London 1992, Vol. 1, pp. 558–561, here p. 560f; A. J. Schwartz: Currency Boards: Their Past, Present and Possible Future Role, in: Carnegie-Rochester Conference Series on Public Policy, Vol. 39 (1993)., pp. 147–187, here p. 170 ff.

  15. W. Fuhrmann and R. Richert, op. cit., Ein Währungssystem mit einem Currency Board, in: WISU, Vol. 24 (1995), pp. 1035–1039, here p. 1038.

  16. Cf. S. H. Hanke and K. Schuler: Currency Boards for Eastern Europe, op. cit.,, p. 3.

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  17. Cf. A. J. Schwartz, op. cit., Currency Boards: Their Past, Present and Possible Future Role, in: Carnegie-Rochester Conference Series on Public Policy, Vol. 39 (1993), p. 183 f.

  18. Cf. K. Osband and D. Villanueva, op. cit., Independent Currency Authorities. in: IMF Staff Papers, Vol. 40 (1993), pp. 204.

  19. B. Eichengreen: International Monetary Arrangements for the 21st Century, Washington 1994, p. 73.

  20. Cf. S. H. Hanke and K. Schuler: Financial Reform and Economic Development: The Currency Board System for Eastern Europe. in: P. J. Boettke (ed.): The Collapse of Development Planning, New York 1994, pp. 310–326, here p. 316.

  21. K. Osband and D. Villanueva, op. cit., Independent Currency Authorities. in: IMF Staff Papers, Vol. 40 (1993), pp. 456.

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  24. Cf. S.H. Hanke and K. Schuler: Currency Boards for Eastern Europe, op. cit., p. 7.

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  25. M. Willms, op. cit., Internationale Währungspolitik, 2nd edition, Munich 1995, p. 165.

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Authors and Affiliations

  1. University of Innsbruck, Austria

    Matthias Sutter

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  1. Matthias Sutter
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Sutter, M. A currency board for European Monetary Union outsiders. Intereconomics 31, 131–138 (1996). https://doi.org/10.1007/BF02930440

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