EMU and the International Monetary System
Chapter

1 Introduction

Editor(s):
Thomas Krueger, Paul Masson, and Bart Turtelboom
Published Date:
September 1997
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Author(s)
Paul R. Masson., Thomas H. Krueger. and Bart G. Turtelboom 

Economic and monetary union in Europe (EMU) will produce profound changes in exchange and financial markets, and these are likely to affect in a fundamental way the activities of a broad range of market participants and private and official institutions. As part of an ongoing effort at the International Monetary Fund to understand the broader, systemic implications of EMU, a conference was held in Washington, D.C., on March 17–18, 1997, which brought together a distinguished group of several hundred academics, officials, and policymakers. The conference, cosponsored by the Fondation Camille Gutt and the International Monetary Fund, was on the subject of EMU and the international monetary system, and it generated many insights into the effects of the introduction of the euro.

Given the widespread interest in this topic, it was felt useful to disseminate this work to a wider audience, and the present book, reporting on the papers and proceedings of the conference, is the result. This introduction gives a short summary of the papers, three speeches, and two roundtable discussions, organized along five main themes: the characteristics of the euro and its potential role as an international currency; EMU and international policy coordination; EMU and the relationship between the Fund and its EMU members; lessons of European monetary integration for the international monetary system; and the transition to EMU. The papers, which appear in the chapters that follow in the order in which they were presented at the conference, are accompanied by discussants’ comments, and in some cases by a summary of the general discussion. Written versions of the presentations at the roundtables and of the speeches are also included in the book.

Characteristics of the Euro and Its Potential Role as an International Currency

The attractiveness of the euro is likely to be determined mainly by the macroeconomic policy stance in Europe, and, in particular, by the success of the European Central Bank (ECB) in achieving low inflation. On the latter issue, there was general agreement that the ECB would follow in the steps of the Bundesbank in its dedication to price stability, and be independent of political interference as provided in its statutes. Other factors are also likely to be important in affecting the international use of the euro, including the development of integrated, liquid, and efficient European financial markets. Reserve currency use is likely to evolve slowly, but the euro would start as the second most important reserve currency and could, over time, rival the dollar.

Will the Euro Be a Strong Currency?

Several chapters in this book deal with the potential strength of the euro, focusing in some cases on portfolio diversification as the primary factor influencing the initial strength or weakness of the euro.

Fred Bergsten, in Chapter 2, addresses the issue of the potential strength of the euro by first reviewing the criteria determining the global role of a currency. The euro zone will be bigger than the United States, both in terms of the size of the underlying economy and the extent of its external trade. In the absence of exchange controls, European capital markets, presently small by U.S. standards, should expand strongly in the medium term. Given the strong anti-inflationary mandate of the ECB, the European economy should be stable and perform well, though Bergsten acknowledges the resistance in Europe to much-needed structural reforms. Taken together, he posits, the euro has all characteristics to become a strong currency in the international monetary system. He takes a more nuanced view of the prospects for an immediate appreciation of the euro, though in his view European currencies are now overdepreciated (perhaps deliberately) against the dollar, making an appreciation appropriate. Bergsten also stresses that despite his general preference for target zones for the major currencies to facilitate policy coordination, uncertainty surrounding the implementation of EMU would make target zones undesirable initially.

Chapter 3, by George Alogoskoufis and Richard Portes, analyzes the impact of EMU on the euro-dollar exchange rate and the external position of the European Union (EU). They argue that there will be excess demand for the euro, which will lead it to appreciate. Their argument for the enhanced international prominence of the euro compared with the deutsche mark is based on the existence of network externalities for a currency: when more people use a particular currency as a means of payment, transaction costs decrease, which induces even more people to use that currency. The need to use the U.S. dollar for intervention purposes within the euro region will disappear with the arrival of the euro, and in foreign exchange markets the position of the euro will be enhanced and the currency will be cheaper to use. Many foreign exchange transactions are now intermediated through the dollar because a “dollar round-trip” is often cheaper than directly trading two other currencies, but this will tend to change with the introduction of the euro.

With regard to the unit of account function, the euro is also likely to hasten the decline of the dollar as the denomination of international trade. All intra-European trade will be invoiced in euros and those countries pegging their currency to the euro are likely to see a growing fraction of their trade invoiced in euros rather than dollars. Finally, the euro will reinforce the declining trend of the dollar for the denomination of financial assets.

Paul De Grauwe, in Chapter 4, is more agnostic about the potential strength of the euro. His analysis of the “ins” and “outs” of EMU underscores that the early behavior of the euro could be affected by the specific countries participating in EMU. Notably, some of the candidates like Italy and Spain have currencies that, he argues, are presently undervalued; should these countries not participate in EMU from the outset, the euro might initially depreciate.

Robert McCauley and William White, in Chapter 12, point to the possibility that the supply of assets in euros might eventually increase more than the demand for those assets, leading to depreciation, not appreciation, of the euro. This view contrasts with both the analysis in Alogoskoufis and Portes, and Bergsten’s expectation. Indeed, because of relatively underdeveloped European financial markets, the share of the world supply of assets in EU currencies falls at present well short of Europe’s economic importance. This might well change with EMU, when in addition to the redenomination of existing liabilities in EU currencies into euros, foreign issuers might want to do a larger share of their borrowing in euros than in existing EU currencies, provided integrated European financial markets meant efficiency gains and hence lower borrowing costs.

Volatility

Even a strong euro might be subject to considerable volatility—a subject discussed in several chapters.

Chapter 7, by Agnès Bénassy-Quéré, Benoît Mojon, and Jean Pisani-Ferry, sets out to address the question of how economic and monetary union will affect exchange rate volatility between the euro and the dollar. In answering this question, the paper focuses on the preferences of the ECB in the steady state and does not address credibility issues during the transition.

To study the volatility issue, these authors develop a small three-country model with short-run nominal rigidity but long-run flexibility. Their results suggest that monetary union of two countries (“EMU”) increases the volatility of the real effective exchange rate of the currency of the third country (“United States”) to U.S. shocks or symmetric European shocks. This is so because the ECB can internalize the externality coming from macroeconomic interdependence; the ECB would adjust interest rates more than individual European countries and the dollar exchange rate would move more. Asymmetric shocks in Europe do not affect the dollar exchange rate since they are automatically offset in Europe. The authors use this model to present quantitative evidence on the question of euro-dollar rate volatility and conclude that EMU is likely to lead to moderately higher volatility of the real effective exchange rate if the central bank targets the exchange rate in addition to inflation.

Daniel Cohen shares the conclusion that exchange rate volatility is likely to increase. Indeed, he presents a numerical example in Chapter 13 that suggests that the increase in volatility could be substantial relative to the present monetary and exchange rate regime. His model allows for both price and demand shocks. The policymaker’s objective function takes into account inflation and aggregate demand, as well as a fiscal variable, while allowing for different degrees of policy coordination. While the author’s overall assessment is that EMU would raise exchange rate volatility, his analysis also indicates that the result depends critically on the dominance of price shocks. By contrast, if demand shocks dominate, Cohen’s model suggests that exchange rate volatility might even decline under monetary union.

Paul Masson and Bart Turtelboom (Chapter 8) argue that, given the paucity of reliable EMU-wide economic indicators at the start of EMU and the practical challenges involved in devising new monetary policy operating procedures, the ECB may have little choice but to place considerable weight on the exchange rate in the early stages of EMU. This may indeed result in a relatively stable euro exchange rate.

De Grauwe identifies another potential aspect of exchange rate volatility: the relationship between the countries adopting the euro and those EU countries that do not join EMU. A successor to the exchange rate arrangements under the ERM has been designed to link the “ins” and the “outs”—termed the ERM II. This mechanism would involve wide bands and the proviso that exchange market intervention should not endanger the price stability objective of the ECB. It is envisaged that realignments be jointly decided, done in time to prevent “one-way bets” from developing, and small enough so that new central rates would be within the old bands of fluctuation.

De Grauwe argues that though the above features, and the achievement of a considerable amount of economic convergence, would deter speculation and make less likely the type of crisis that occurred within the ERM in 1992–93, other features might make the ERM II vulnerable. In particular, the crucial nature of the Maastricht fiscal criteria might make countries vulnerable to shifts in market sentiment, especially if they have high debt levels. For instance, a country whose commitment to entering EMU was thought to be flagging might pay higher interest rates on its debt, widening the budget deficit and setting in motion a self-fulfilling spiral. De Grauwe presents a model of self-fulfilling speculative attacks that illustrates these potential risks—risks that rise as the level of government debt increases. Another problem facing the ERM II, as De Grauwe argues, is the present overvaluation of the core currencies relative to the peripheral ones, so that the latter might therefore need to appreciate over time.

Use of the Euro as Official Reserve Currency

Several chapters discuss the potentially attractive features of the euro as a reserve currency, though its use for that purpose may only develop gradually. In Chapter 8, Masson and Turtelboom use stochastic simulations to analyze the effects of replacing European currencies by the euro, including the impact on official reserve holdings. The simulations are performed for two monetary policy scenarios, allowing for the ECB to be guided by either a monetary or an inflation target; the authors also analyze a variant of inflation targeting whereby the ECB places some weight on output conditions. The simulation results suggest, for given structural relationships, that macroeconomic variables for the EU should be at least as stable after EMU as at present.

Masson and Turtelboom then analyze the potential demand for reserves after EMU in the light of the results from the stochastic simulations. Simulation results suggest that the incentives to hold foreign exchange reserves in euros for store of value purposes should be somewhat greater than for the deutsche mark at present, and hence that there should be incentives to diversify away from the dollar. However, they argue that holdings of dollar reserves by EU central banks, though they appear to be too large in the light of EMU, are unlikely to be a major influence on the exchange rate between the euro and the dollar. Masson and Turtelboom argue that more important than these factors will be the relative stance of monetary policies and economic conditions. They also point out that the bulk of reserves outside the EU are held by East Asian countries, which are unlikely to want to use the euro as an exchange rate anchor, so substitution of dollars by euros would likely result from gradual portfolio diversification.

Bergsten and Alogoskoufis and Portes concur with the view that the euro will have attractive features and that, after some transition period, the euro should constitute a rival to the dollar as a reserve currency: it would be based on a wide economic area and would develop as a vehicle for invoicing trade and for effecting foreign exchange transactions. Nevertheless, the potential for a shift out of dollar reserves is generally not viewed as a major issue for exchange rates.

The Euro and Financial Markets

Two chapters—Chapter 11 by Alessandro Prati and Garry Schinasi and Chapter 12 by McCauley and White—see the introduction of the euro as a catalyst for the development of integrated money and bond markets in Europe. Even without EMU, technological progress and regulatory changes are already forcing a rationalization of European banking systems. The arrival of the euro will further increase competition among banks and between banks and alternative sources of funds. While this should eventually lead to a further consolidation of the sector, McCauley and White suggest that slow regulatory progress and the value of local expertise will retard this process.

Prati and Schinasi focus on prospective developments for European and international capital markets, including the impact of EMU on banking institutions and capital flows. They argue that the introduction of the euro will likely reinforce existing trends toward more liquid and integrated capital markets, which could rival U.S. markets in size. The paper sees scope for further securitization of European finance, the development of more precise measures of credit and liquidity risk, regulatory initiatives to reduce or eliminate existing cross-border restrictions on investment, and increased opportunities for portfolio diversification. All these trends will be reinforced by technological advances in derivatives and securities markets. Over time, they argue, this will lead to a harmonization of trading practices and, ultimately, fully integrated markets.

The development of EMU-wide repo and interbank markets will depend importantly on the legal and tax system and on the instruments employed by the monetary authorities, including the extent to which reserve requirements will be imposed on repo operations. The disappearance of foreign exchange risk will refocus the pricing of government bonds on credit risk and the related ratings; in this regard, they expect a narrowing of yields but remain agnostic as to its effect on market liquidity. Prati and Schinasi also argue that further disintermediation and increased competition for investable funds will lead to mergers and acquisitions among banks and between banks and specialized firms and institutional investors. At the retail level, it is argued that the introduction of the euro would further stimulate cross-border mergers and alliances but regulatory reform would be essential to support the needed, and more far-reaching, consolidation in this sector.

The chapter by McCauley and White addresses similar issues, though focusing more narrowly on bond markets and banking developments. The paper first sets out the background for the banking system in which the introduction of the euro will take place. Many banks in continental Europe, though experiencing rising profitability, are still substantially less profitable than their Anglo-Saxon and Scandinavian counterparts. Hence, even in the absence of the euro, restructuring will likely be the order of the day. As for the competition from nonbank sources of capital, the paper puts the advantage squarely on the side of direct market access. Although inertia on the part of market participants, legal, regulatory, and supervisory differences, and continuing political sensitivities to takeovers and mergers, especially with foreign firms, are likely to check the pace of increasing competition, it will still be important to ensure that banks and their personnel face the right incentives to avoid excessive risk-taking when coping with the additional competition. It is thus not unlikely that national regulators will increasingly have to cooperate or at least make sure that the home rule principle is working effectively. For world financial markets, it seems likely in the longer term that supervisory and regulatory structures will become more harmonized.

In bond markets, McCauley and White see the arrival of the euro as a potential driving force toward an integrated market, although some of the changes may take time to manifest themselves given very different market structures. In government bond markets, the disappearance of national currencies will likely increase the focus of market makers on creditworthiness and its measurement, leading to very small pricing differences between high-quality borrowers but larger ones among countries with different debt-to-GDP ratios. Overall, the euro bond market is likely to be a growing, highly liquid place. Disintermediation will stimulate the growth of securities markets and the depth, breadth, and liquidity of the market could attract net portfolio flows into the euro zone.

EMU and International Economic Policy Coordination

A number of conference participants, including Bergsten and Alogoskoufis and Portes, expressed concern that EMU would lead to Europe having less interest in international policy coordination. In addition, the Maastricht Treaty raises complicated issues of responsibility for international economic policy and of representation of the EU in international forums. The ECB has clear responsibility for monetary policy, and the Council for formal exchange rate agreements, in addition to providing general orientations for exchange rate policy. There is a gray area between them, which might make the ECB reluctant to venture into agreements where jurisdiction is unclear. In practice, international monetary cooperation might not be facilitated by the concentration of monetary powers in the ECB, since coordination might need to involve fiscal authorities as well; but here, there will be no clear, single interlocutor.

While the problem of representation is also acknowledged in the chapter by Masson and Turtelboom, they argue that in a situation of considerable uncertainty concerning the economic structure—knowledge of which was essential to carrying out an intermediate targeting framework, whether for money or inflation—the ECB might be receptive to international coordination initiatives.

Bergsten argues that EMU should in effect lead to a replacement of the Group of Seven industrial countries by a Group of Three for economic and monetary issues. However, for that to occur, it would be necessary for Europe to have a clear counterpart to the ECB when it came to fiscal policy and exchange rates. Until this occurs, he is concerned that a situation of “benign neglect” will prevail; this would be dangerous as it would slow the responses of Europe to potential crises.

Alogoskoufis and Portes also discuss the implications for international monetary policy coordination. In order to avoid an appreciation of the euro, the ECB could loosen monetary policy or other central banks could tighten monetary policy. The authors prefer the latter since this would be the more appropriate stance from the perspective of monetary conditions in the international monetary system.

John Berrigan and Hervé Carré, in Chapter 5, discuss the implications of EMU for neighboring non-EU countries and the CFA franc zone. A central theme of the paper is that EMU does not entail a radical change of the present system that would call for altering existing agreements or concluding new exchange rate arrangements between the euro bloc and these regions. With respect to the CFA franc zone countries, the authors argue that the special historical relationship with the French treasury has had clear advantages for these countries in the past and that its continuation should be in their best interest, even as the French franc is replaced by the euro. For the countries in Central and Eastern Europe, some may eventually enter into euro-based exchange rate arrangements with the EU. However, Berrigan and Carré suggest that these countries should not prematurely adopt a pegged exchange rate before convergence is achieved, and points out that the ERM II was designed for existing EU countries, which in most cases are close to qualifying for EMU. For the Mediterranean countries, it is argued that the euro may become an anchor currency over time, but not in the immediate future.

Fabio Ghironi and Francesco Giavazzi investigate the implications of various degrees of policy coordination among regions (Chapter 14). Their model highlights the incentives and potential conflicts for various policymakers in deciding on the initial size of EMU. The analysis is based on a three-region model with each region having two policymakers—a fiscal and a monetary authority.

Ghironi and Giavazzi show that the incentives for the specific size of EMU may be different not only for the different regional groups, but also for the two policymakers within the same region. Their results depend importantly on the degree of policy coordination among the regions and on the fiscal activism allowed in the EMU area, with the authors arguing that the most likely scenario is one where the Stability and Growth Pact will severely limit active fiscal policy, at least initially. Under these circumstances, and assuming that the relationship between the ins and outs of EMU is one in which there is no active coordination of policies, the ECB would prefer that only a relatively small group of countries participate in EMU while the fiscal authorities would prefer a larger union. Thus, a potential conflict between fiscal and monetary authorities over the number of EMU participants may emerge when the decisions are taken in 1998.

EMU and the Relationship Between the Fund and Its EMU Members

Both papers on this topic, by Jacques Polak and Niels Thygesen (Chapters 16 and 17, respectively) concur that EMU will not affect the rights and obligations of members under the IMF’s Articles of Agreement. However, they argue that the transfer of monetary policy responsibilities to the ECB and the replacement of existing European currencies by the euro raise a number of important issues for the IMF. These include how surveillance is to be carried out, whether and how Fund resources should be made available to EMU members, how Fund quotas might be affected, whether the special drawing right (SDR) needs to be redefined, and how the euro would be used in Fund operations. It is clear, also from the discussion at the conference, that no simple answers are yet available, but that work on these questions is urgently needed.

Polak and Thygesen stress the importance of a continuation of Fund surveillance; indeed, it may be more relevant in the context of a complicated transition to EMU of a subset of EU countries and of the establishment of the ERM II arrangement. Clearly, Fund surveillance should involve the ECB; modalities for consultations with it as well as the national authorities, which will retain responsibilities for other macroeconomic policies, need to be worked out. This also includes the possible representation of the ECB at the IMF Executive Board, which Thygesen argues would be helpful when macro-economic policies in the EU are discussed within the context of multilateral surveillance.

On the issue of possible use of Fund resources, Polak argues that, though they were unlikely to draw on them, individual EU countries might nevertheless be somewhat more likely to come to the Fund after EMU, since monetary bailouts and EU balance of payments assistance would not be forthcoming. He also suggests that a member country would still have a balance of payments, and hence the criterion of “balance of payments need” would still be relevant under EMU, a point challenged by some other conference participants.

In his lunchtime speech reported in Chapter 6, Philippe Maystadt also discusses the implications of EMU for the IMF and concurs with Polak and Thygesen that EMU members, at least for the time being, will remain individual members of the Fund. But he also sees EMU as having profound external ramifications, of which many have not yet been fully addressed. Among these issues are the principles governing the SDR, including whether the SDR should be a country- or a currency-based basket. Also to be investigated is the scope of Fund surveillance of EMU members; while Maystadt agrees with Polak and Thygesen that the Fund would have an important surveillance role, many aspects still remain to be specified, including its appropriate counterparts (other than the ECB) at the EMU-wide level. Maystadt also argues that individual EMU members should continue to have access to Fund resources; however, the concept of balance of payments need as it would apply to individual countries participating in EMU should be reexamined.

Lessons of European Monetary Integration for the International Monetary System

Chapter 9 presents the interventions of five participants in a lively round-table discussion of whether EMU provided general lessons for the future development of the international monetary system. Several participants in this roundtable are skeptical that EMU will be a stepping stone to a similar arrangement on a broader scale. Some also point to the uniqueness of the historic experiment that will leave the ECB without a direct counterpart responsible for European-wide fiscal and structural policies.

Jacob Frenkel sees the international monetary system as being characterized by an enhanced role for financial markets and capital movements and a reduced role for policy instruments. Fiscal policy is guided by medium-term considerations, protectionist commercial policies have been discredited, monetary policy surprises are not a useful policy instrument, expected monetary changes are ineffective in influencing output, and exchange rate policies must be consistent with other macroeconomic policies. In sum, there is a new world in which policymakers need to engage in a dialogue with markets. This requires transparency and better-defined policy objectives. As for the lessons of European monetary integration for the international monetary system, Frenkel believes the world will remain a multipolar place in which the debate over the relative merits of fixed and flexible exchange rates will continue.

Takatoshi Kato provides a Japanese perspective on EMU. First, he sees long-term benefits from EMU resulting from expanded trade flows and increased capital flows. Japanese banks and investors are taking a wait-and-see approach, but Kato expects increased investment in euro-denominated assets if European markets become more liquid after the introduction of the euro. Second, he notes that the transition toward EMU will coincide with implementation of the financial sector reforms that the Japanese government has recently announced. These reforms will boost the role of the yen and it is therefore not clear that the introduction of the euro will lead to a reduced role of the yen in international capital markets and as a reserve currency.

Mervyn King points out that monetary history associates one currency with one country. The Maastricht Treaty has turned the “one country, one currency” principle into “one market, one money.” Hence, he argues that the single most important implication of EMU is that a broad set of decisions will now need to be taken jointly. In his opinion, the success of EMU will depend on the degree of sustainable convergence among its participants.

André Szász poses the goal of European monetary integration as a solution to France’s desire to have a European rather than German monetary policy and Germany’s desire for tighter European integration. In the German view, monetary union is a way toward political union, provided it is underpinned by stable macroeconomic policies.

Edmund Truman sees European monetary integration more as a natural outgrowth of postwar integration efforts in Europe than as a mechanical reply to the demise of the Bretton Woods system. He is not convinced that EMU will lead to something bigger on a world scale. As for EMU’s practical implications, he raises the issue of political accountability of the ECB. He also does not see the arrival of the euro as a threat to the dollar; the advantages from international use of a currency are in any case often overstated.

Paul Volcker, in his dinner remarks collected in Chapter 10, also considers the lessons and challenges of EMU for the international monetary system. He terms EMU a crowning development for the EU. The ECB is a “unique enterprise” since it will operate without a parallel government agency. Though some may applaud this extreme form of central bank independence, he does not believe that a central bank can operate in a political vacuum and is in favor of the establishment of an intergovernmental council for the ECB to interact with.

As for the long-term implications of EMU, Volcker stresses that the ultimate role of the euro in the international monetary system is uncertain and warns of the danger of neglecting exchange rates by the three major central banks. If financial markets sense this, large amounts of capital will ride currency trends and any attempt at international policy coordination would face a difficult task. Although he suggests that the size of the three main currency blocs could weaken the influence of the IMF, he argues that it is in the interest of all concerned—central banks and the IMF alike—to determine and defend ranges of equilibrium exchange rates.

Transition to EMU

Though the conference primarily dealt with the international monetary system after EMU, the issue of the transition to EMU was discussed at a final roundtable (Chapter 18), as well as during a good part of a lunchtime speech by the IMF’s Managing Director, Michel Camdessus. The roundtable participants had differing views of the extent that transition was likely to proceed smoothly, and of the possible pitfalls in the early years after the start of EMU. Also raised was the issue of a possible delay of the start of EMU. Several participants as well as the Managing Director stressed that progress in this historic enterprise should not be jeopardized by a postponement.

Lars Heikensten highlights some dangers associated with the transition. He is skeptical that EMU would operate smoothly with rigid labor markets, and is concerned that EMU might not be a good thing for Sweden if it faced asymmetric shocks. Nevertheless, staying out has disadvantages since, in any case, the Swedish financial sector would begin adopting the euro, and volatility of the exchange rate against the euro might pose significant problems.

Paul Jenkins argues that increased confidence in financial markets is needed to ensure a successful transition to EMU. In his view, sound economic performance, sustained by transparent and clearly articulated procedures governing the transition, are prerequisites for a stable financial market environment. In this regard, Xavier Larnaudie-Eiffel stresses the progress made in ensuring a smooth transition and in giving legal certainty to the euro when it is created, including outside the EU. In addition, he emphasizes that the selection of qualifying countries will be part of a transparent process and subject to clear criteria.

Klaus Regling reiterates the German position that the criteria should be applied strictly, pointing to the need to satisfy German public opinion that monetary union would ensure stability. Since many countries are still above the deficit criterion, more fiscal measures are needed. Given the use of “creative accounting,” in his view there is no more room for interpretation in meeting the criteria. He does not exclude the possibility that Germany might not qualify, which might therefore lead to postponement of EMU. However, the German government intends to take the necessary measures to avoid this possibility.

In a luncheon speech, Michel Camdessus suggests that EMU is one of the most important and promising developments in the international monetary system in recent decades and, indeed, a historic enterprise (Chapter 15). He argues that the benefits from EMU will be substantial and that the conditions for EMU’s successful start are largely in place, including a broad consensus in Europe on the approach to macroeconomic management. In these circumstances, much would be lost from a delay of EMU, and he emphasizes that it is now time to put to rest any lingering doubts about the future of EMU and its timely implementation. This would require also addressing squarely the remaining tasks, including those specified in the Maastricht Treaty and the Stability and Growth Pact, as well as moving ahead with structural reform—tasks that are not only necessary for EMU, but also constitute good policies from the perspective of each country. Among the remaining tasks is a need to devote more attention to the external dimensions of EMU. In this context, EU countries not participating in EMU from the start will have an important self-interest in seeing a successful launch of the euro. However, these countries would need to be given a clear framework for joining EMU as soon as possible thereafter. Camdessus also discusses some aspects of the potential role for the Fund under EMU, emphasizing that the Fund’s expertise could be usefully employed, in particular in assessing, and addressing, exchange rate misalignments in the future international monetary system.

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