GERMANY AND THE EMU

The German government has been an eager proponent of a European moneta ry union (EMU), where the European Central Bank (ECB) will control mon etary policy. The national loss of sovereignty will be particularly se vere for Germany which, due to its size and established credibility, i s able to pursue a relatively independent monetary policy. The ECB inh erits the Bundesbank's organizational structure, mandate of price stab ility, and location in Frankfurt. However, ECB council members will la rgely come from societies with greater inflation tolerance than German y. The new central bank may therefore tolerate more inflation than the Bundesbank. Prized national symbols - the independent Bundesbank and the D-mark - will also be sacrificed, and Germany will lose seigniorag e revenues. In view of these losses, the German government's eagerness to launch the EMU appears puzzling. Linkage explanations, implicating that Germany would receive concessions in the foreign policy domain, have been invoked to resolve this puzzle. The article focuses on the d ifficulties of verifying such linkage, and holds that it is unlikely t hat the EMU has been formally linked to German reunification or Europe an political union (EPU). A third link, which is more plausible, but e qually difficult to verify, states that the EMU is linked to access to the EU common market for Germany's neighbours to the East. It is stil l more likely that German EMU eagerness stems from expectations, in Ge rmany, that the positive political effects of the EMU will outweigh lo sses in other domains.