Financial Liberalisation and Exchange Rate Policy in the Newly Integrating Countries of the European Community

Abstract

Following the latest enlargement of the European Community, there has been a great deal of discussion about the creation of a European financial area. This was seen as an essential part of the single market deadline of 1992. As the tenth anniversary of the EMS has been reached, the liberalisation of capital movements has progressed faster than expected. Until recently only Germany, Denmark and Benelux had been financially and monetarily integrated via the exchange rate mechanism (ERM) of the EMS. Now even ERM countries which traditionally relied on capital controls such as France and Italy have liberalised before the July 1990 deadline. The association of financial integration with monetary policy coordination has not always been welcome, however. This is clear from the experience of the UK, free of controls but avoiding any commitment to the ERM. Ireland and Spain, retaining controls and present in the ERM, provide a third possibility. Greece and Portugal, retaining controls and absent from the ERM, are the fourth possibility. The focus of this chapter is on this fourth category, and on Spain, even though some references to Ireland as well as to Italy will be made in the context of the catching-up process. Economic cohesion is indeed the counterpart of both the single market objective and the wish for a monetary union.

The author writes in his personal capacity, following the views expressed in European Economy, no. 36, May 1988.