![]() Even during 1973-1979, intra-European exchange rates were not fully flexible due to the European Snake. However, European countries have not experienced a flexible regime for a long time. Policy makers should instead compare EMU to a general floating regime which would more likely be the alternative regime to EMU. Hence, EMU is a component of the present regime rather than an alternative. Should EMU be postponed, the European Exchange Rate Mechanism (ERM) would encounter serious difficulties due to the removal of stabilising expectations in a world of perfect capital mobility. However, the present regime already includes EMU expectations. Markets should be mainly interested in a comparison of the euro/dollar exchange rate to the present average exchange rate of European currencies against the dollar. ![]() Even if their is little uncertainty about the list of the participants, the euro will not be equivalent to the average of previous European currencies, not least because monetary policy will be unified.įinally, it is not clear what monetary regime should be chosen as a benchmark. Secondly, it is not possible to estimate a model of exchange rate determination for a currency that does not exist yet. International imbalances, growth rates or inflation rates do have an impact on exchange rates, but it is very difficult to measure this impact and to predict its schedule. Models of exchange rate determination usually fail to outperform the naive model of using the present exchange rate for the best prediction of the forthcoming rate. However, three main difficulties impede a precise forecast of the euro/dollar exchange rate.įirstly, one should be aware of the poor performance of exchange rate theories. Many factors will determine the external value of the euro. Thus, euro/dollar fluctuations will be driven by market forces and by ECB interventions aimed at stabilising European prices. In September 1997, during the summit of Mondorf-les-Bains, EU finance ministers decided not to use their legal opportunity to formulate general exchange rate policy orientation, except in exceptional circomstances.
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