The transition to E.M.U.: structural and strategic aspects

The recurrent crises in the EMS have bolstered a lively debate about the transition to EMU. Indeed the political economy of regional integration is at odds with the theory of optimum currency areas. Essentially static and based on real criteria alone, the latter is not suited to deal with a process which has historical roots, political ends, real and nominal dimensions. The relevant concept is convergence. ; Part I first discusses the interplay of nominal and real convergence, then examines the structural and behavioural asymmetries between European countries. It shows why convergence is not the outcome of spontaneous market mechanisms. Resting on deep-rooted asymmetries, market forces interfere with ill-conceived policies to induce a divorce between nominal and real convergence. Three types of asymmetries, which raise concern for the transition to EMU, are highlighted: the conditions of competitiveness, the disparities in the transmission of monetary policies, the difficulties of fiscal consolidation. ; Part II draws lessons from the structural analysis which enables us to define the principles and the operational procedures of a workable transition. Three principles are emphasized: self-selection of countries respective to EMU membership according to their own convergence paths; achievement of the highest stability of exchange rates compatible with the progress of real convergence; compliance with the institutional procedures written down in the Treaty. These principles have strong operational consequences: the emergence of a hard core working as a stable center to guarantee the coherence of multiple transitions; the set-up of a two-tier exchange rate arrangement within the wide bands; the strengthening of financial solidarity and monetary co-responsibility within the hard core.