Policy Options for Joining the Euro
AbstractAssuming the eventual adoption of the Euro, the paper reviews the run-up and the medium run issues on the path towards the Euro. It shows that various policy options are possible, especially with respect to the exchange rate regime and management. It also shows the limits of monetary policy when fiscal and income policies are not consistent with monetary policy. In the run-up phase of accession, the main constraints come from the recommendation to target a conversion exchange rate, while major gains can be obtained from an increase in money demand and a fall in interest rates once market expectations converge towards the conversion. In the medium run preparation, a fixed exchange rate extracts a high price in terms of high real interest rates and losses of competitiveness, unless fiscal policy is tight and wage settlement are market-based or kept under control. Floating exchange rates do not necessarily solve these problems but enable monetary policy to regain some of the effectiveness that it loses under fixed exchange rates. Eventually, a sound fiscal and income policy opens the way to a scenario of accommodating monetary policy and convergence towards the Euro. A political reading of the Maastricht conditions suggests that early adoption of the Euro is unlikely to be supported by the incumbents. It would then only make sense as a way out of a crisis.
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Bibliographic InfoPaper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 10301.
Length: 33 pages
Date of creation: 2001
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-03 (All new papers)
- NEP-EEC-2003-11-03 (European Economics)
- NEP-IFN-2003-11-03 (International Finance)
- NEP-MAC-2003-11-03 (Macroeconomics)
- NEP-MFD-2003-11-03 (Microfinance)
- NEP-MON-2003-11-03 (Monetary Economics)
- NEP-RMG-2003-11-03 (Risk Management)
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