Introduction

From all appearances the process of European monetary unification continues to gather momentum. Nearly four years have passed since the last significant realignment of exchange rates of members within the European monetary system (EMS). All significant controls on capital movements among member countries have been removed. Discussions of the establishment of a European central bank and a single currency are proceeding apace. If the current timetable is observed the transition will have been completed by the end of the decade.

At the same time there remain serious questions about the advisability of a European Monetary Union (EMU) voiced, in the most recent round of discussions, by the governments of the United Kingdom and Spain. By definition, EMU involves a sacrifice of monetary autonomy. In response to country-specific shocks, governments will no longer have the option of adopting a monetary policy which differs from that of the union as a whole. Insofar as monetary policy is useful for facilitating adjustment to disturbances, adjustment problems may grow more persistent and difficult to resolve.

These concerns are reinforced to the extent that it is believed that completion of the internal market will place new limits on the use of fiscal policy. Not only will individual governments have lost autonomy over the use of seigniorage to finance budget deficits but, insofar as the 1992 process renders factors of production increasingly mobile, constraints will be placed on their ability to impose tax rates significantly different from those of their neighbours.