TOWARDS MONETARY UNION IN EUROPE - REFORMS OF THE EMS IN THE PERSPECTIVE OF MONETARY UNION

This article reviews a number of options to reform the EMS in the ligh t of the currency turmoil of 1992-3. While greater flexibility - wide fluctuations margins and frequent small realignments - may now seem at tractive to some countries, notably the United Kingdom, steps in this direction are likely to lead to increased instability and divergence w hile postponing for a long time advances towards monetary union. If an ything, the fluctuation margins and the Basle-Nyborg Agreement of 1987 providing mechanisms for the short-term defence of exchange rates, ne ed to be tightened up. The article also discusses the scope for streng thening monetary co-ordination in the European Monetary Institute whic h is to start on 1 January 1994, respecting the principle that monetar y sovereignty should remain ultimately in national hands until the sta rt of fall monetary union and the set-up of the European Central Bank. Over the weekend of 31 July-1 August 1993, the EC monetary authoritie s found themselves unable to defend the existing EMS against the stron g speculative pressures on several currencies and they agreed as a las t resort to widen fluctuation margins to +/-15 per cent. The central r ates were preserved. Although this step marks a clear step in the oppo site direction of what is recommended in the present article - prepare d about two months before the dramatic developments - the author has c hosen to make only minimal factual corrections to the analysis and pro posals in the belief that the issues addressed under the heading of re forms in the EMS will have to be faced sooner or later, if Member Stat es wish to revive the EMU process.