European Monetary Reform: Progress and Prospects
IN THE PAST TWO YEARS, a new plan for monetary union in Europe has gained widespread popularity. The plan has also invigorated the initiative to build a single currency area among European Community (EC) countries-an initiative that has been a recurrent feature of the debate on European monetary policy throughout the postwar period. Indeed, many observers now believe that the achievement of a monetary union is highly likely: C. Fred Bergsten states that Western Europe is "almost certain [emphasis added] to go beyond 'completion of the internal market' to an Economic and Monetary Union, or EMU." The policy problems related to monetary reform are determined by the approach taken to reform. In the late 1960s, two alternative strategies were much debated; surprisingly, they have received little attention recently. The first program, known as the gradualist strategy (the supporters of which have been labeled "economists"), relies on progressive removal of trade barriers, convergence of inflation rates, progressive stability of exchange rates, and parallel modification of monetary policies and institutions. The second strategy involves a sudden currency reform (its supporters have been labeled "monetarists"). This strategy amounts to either the irrevocable locking of exchange rates, with the elimination of target zones, or the replacement of national currencies with a single currency. Both possibilities would require a common central bank to manage the system.