Trade Policy

The past half-century has been marked by a number of experiments with dif- ferent international exchange-rate arrangements. Under the Bretton Woods system, designed at the end of World War II, currencies of participating nations were pegged to the dollar and only occasionally adjusted. Since that system was abandoned in the early 1970s, exchange rates of major industrialized countries have generally "floated" against each other in response to market forces. However, a number of European countries revived the pegged exchange-rate system when they created the European Monetary System (EMS) in 1979.

In the Maastricht Treaty of 1991, members of the European Community agreed to replace their national currencies with a single currency by the year 2000, thereby superseding the cur- rent system of pegged exchange rates under the EMS and permanently ruling out exchange- rate changes. Ironically, events in 1992, including the temporary withdrawal of a number of countries from the EMS exchange-rate mechanism, underscored the shortcomings of a pegged exchange-rate system in the face of economic disturbances.

A. Explain why progress toward a single European currency might be viewed as complementary to the increasing integration of the European market for goods and services.

B. Contrast the economic benefits of a single European currency with the economic benefits of an elimination of European trade barriers. Is a single European currency necessary for a complete integration of the European market?