Three Comments on Exchange Rate Stabilization and European Monetary Union
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This working paper consists of three comments on exchange rate matters, presented at recent conferences in Europe. They concern, respectively, why the Maastricht Agreement of December 1991 specified fiscal targets as the requirements for countries to join European bank intervention in the foreign exchange market. Foreign exchange intervention may be able to have an independent effect on the exchange rate in the short run. Nevertheless, a small country that wishes to fix its exchange rate and eliminate barriers to international capital movement, as a means of integrating with its neighbors, must ultimately be prepared to give up all monetary independence. We learned in 1992 that the populations of most European countries are in fact not yet prepared to give up that much economic sovereignty, notwithstanding the political aspirations of their leaders.