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Parallel Monies, Parallel Debt: Lessons from the EMU and Options for the New EU

Author

Listed:
  • Giorgio Basevi

    () (University of Bologna - Department of Economics)

  • Lorenzo Pecchi

    () (University of Rome II)

  • Gustavo Piga

    () (University of Rome II)

Abstract

In 1975 Niels Thygesen, together with eight other economists - one of us among them - published in The Economist a "manifesto" proposing a new common currency for Europe (Basevi et al., 1975). His co-operation on this subject was pursued within a smaller group, and resulted in the publication of two reports for the EU Commission (Optica Report '75, Optica Report 1976). The proposal in the "manifesto" was ironically re-titled, by The Economist, "The All Saints' day manifesto for European monetary union". In fact it had been published on 1st November, and the "Saints" should have been, according to The Economist, the European Governments if they had adopted and adhered to the proposal. This amounted to launching a new currency that should have circulated in parallel to the national ones, related to them by flexible exchange rates, due to the constraint that such new currency, the "Europa", had to be kept by an automatic formula at fixed purchasing power. In fact the Europa was to be indexed to the inflation rates in the participating countries, according to the weights of their national currencies in what at that time was called the European Unit of Account. As for the two other reports, Optica '75 proposed again a parallel currency, but less than fully inflation-proof, since its standing in terms of purchasing power would have been the same as that of the currency of the member country with the lowest inflation rate. In the Optica 1976 Report, while reiterating the proposal of a parallel currency along the lines of Optica '75, the focus was on designing a joint management of intra-European exchange rates on the basis of inflation differentials. The proposals contained in the three documents where premature, perhaps visionary. On 7 July 1978 the European Council met in Bremen and drew the lines of the European Monetary System, which started on 13 March 1979, on the basis, among other things, of a new quasi-currency - the European Currency Unit (ECU) - composed of a basket of national currencies. Since then, it took almost twenty years before the euro was introduced, replacing the ECU on 1st January 1999. Comparing the euro to such proposals, we note at least two differences. The euro (a) did not start as a parallel currency, but replaced with a pre-announced schedule the national currencies of the countries participating in the monetary union, and (b) it was not conceived as an automatically inflation-proof currency, but one issued by a Central Bank bound by a monetary policy aimed at price stability.

Suggested Citation

  • Giorgio Basevi & Lorenzo Pecchi & Gustavo Piga, 2005. "Parallel Monies, Parallel Debt: Lessons from the EMU and Options for the New EU," CEIS Research Paper 68, Tor Vergata University, CEIS.
  • Handle: RePEc:rtv:ceisrp:68
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    References listed on IDEAS

    as
    1. Fabio M. Natalucci & Federico Ravenna, 2002. "The road to adopting the euro: monetary policy and exchange rate regimes in EU candidate countries," International Finance Discussion Papers 741, Board of Governors of the Federal Reserve System (U.S.).
    2. Falcetti, Elisabetta & Missale, Alessandro, 2002. "Public debt indexation and denomination with an independent central bank," European Economic Review, Elsevier, vol. 46(10), pages 1825-1850, December.
    3. Alessandro Missale, "undated". "Optimal Debt Management with a Stability and Growth Pact," Working Papers 166, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858.
    5. Robert T Price, 1997. "The Rationale and Design of Inflation-Indexed Bonds," IMF Working Papers 97/12, International Monetary Fund.
    6. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR;CES;MSH, vol. 19(38), pages 165-216, April.
    7. Gustavo Piga & Giorgio Valente, 2004. "The Term Structure of Interest Rates and the Public Debt Issuance Policy: A Note," CEIS Research Paper 49, Tor Vergata University, CEIS.
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    Cited by:

    1. Bonpasse, Morrison, 2007. "The Single Global Currency - Common Cents for the World (2007 Edition)," MPRA Paper 5879, University Library of Munich, Germany.

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