A STRATEGY FOR LAUNCHING THE EURO

This paper analyzes the constraints European Union law places on the 1 January 1999 choices of irrevocably fixed conversion rates between th e Euro and the currencies of EMU members states. Current EU legislatio n, notably the Maastricht treaty, requires that the bilateral currency conversion factors implied by the 1 January 1999 choices equal closin g market exchange rates on 31 December 1998, Given that legal constrai nt, there still exist several strategies for choosing the relative pri ces of EMU member currencies against the Euro. Unfortunately, most of these have potentially damaging side effects. One approach, based on o fficial Stage 2 offers of contingent Euro forward contracts with value dates at the start of Stage 3, allows a highly credible preannounceme nt of the bilateral currency conversion factors to be set at the start of EMU. That approach assumes, however, that no prospective EMU membe rs can withdraw between their selection in May 1998 and the start of S tage 3. (C) 1998 Elsevier Science B.V. All rights reserved.