Real Sources of European Currency Policy: Sectoral Interests and European Monetary Integration

TLDR

European currency policies varied widely over the thirty years before the Economic and Monetary Union, with fixed exchange rates mainly facilitating cross‑border trade and investment but costing governments the ability to use currency policy to improve producers' competitiveness. The article argues that sectoral impacts of regional exchange‑rate arrangements, particularly their expected real effects on trade and investment, strongly influenced the trajectory of European monetary integration. Empirical evidence shows that a stronger, more stable currency correlates with greater importance of manufactured exports to the EU’s hard‑currency core, while depreciations increase net import competition, indicating that real trade and investment factors and private interests significantly shape national currency policies.

Abstract

In the thirty years before Economic and Monetary Union was achieved, European currency policies varied widely among countries and over time. In this article, I argue that the sectoral impact of regional exchange-rate arrangements, in particular their expected real effects on European trade and investment, exerted a powerful influence on the course of European monetary integration. The principal benefit of fixing European exchange rates was facilitation of cross-border trade and investment within the European Union (EU); the principal cost of fixed rates was the loss of national governments' ability to use currency policy to improve their producers' competitive position. Empirical results indeed indicate that a stronger and more stable currency was associated with greater importance of manufactured exports to the EU's hard-currency core, while depreciations were associated with an increase in the net import competition faced by the country's producers. This suggests a powerful impact of real factors related to trade and investment, and of private interests concerned about these factors, in determining national currency policies.