The Convergence Criteria: Exchange Rates and Interest Rates — A European Perspective

Abstract

Our previous chapter outlined the way in which exchange rates and interest rates could be viewed from an IPE perspective. Specifically, we used the methodology of the inconsistent quartet to outline the way in which interest rate and exchange rate movements impact upon the international political economy. This chapter will take this analysis one stage further by applying the previously discussed methodology to the issue of the convergence of exchange rates and interest rates, as set out in the Maastricht Treaty. After brief outlines of European exchange rate and interest rate policies (bearing in mind the Maastricht requirements and including an overview of their economic rationale), we go on to examine the dilemmas which the inconsistent quartet poses for a future economic and monetary union.

‘We are worried about the exchange rate developments in the Community. There is at present no effective Community framework for the coordination of policies in this area among all members, while recent developments have surely indicated the urgent need for common action.’

Wilhelm Duisenberg (1976)¹

It is filthy gaines, and a worke of darknesse, it is a monster in nature: the overthrow of mighty kingdoms, the destruction of flourishing States, the decay of wealthy cities, the plagues of the world, and the misery of the people … This is Usury.

Bishop Jewell²