REAL EXCHANGE-RATES WITHIN AND BETWEEN CURRENCY AREAS - HOW FAR AWAY IS EMU

The renewed quest for a European monetary union raises the question: I s Europe ready for a common currency? We compare the conditional varia nce and the persistence of real exchange rate shocks within the German monetary union and between Germany and eight European countries to as sess the viability of a monetary union in Europe. The results suggest a ''Europe of Two Speeds'': A core union among Germany, her smaller ne ighbors and France would be viable today. Further reduction of real ex change rate variability is needed. in contrast, between these countrie s and Denmark. Italy, and the U.K. Alternatively, monetary union shoul d be postponed until further adjustment has occurred. Such a waiting p eriod would neither require nor benefit much from further tightening o f the current EMS.