The Impact of Goods and Capital Market Integration on European Monetary Politics

Abstract

Members of the European Union (EU) have long attempted to unify their monetary policies, whether by fixing exchange rates or moving toward a single currency. The success of these attempts has varied over time, and among EU member states. This article argues that the degree to which a country is integrated into EU trade and finance has a major impact on its willingness to make the sacrifices necessary to pursue monetary integration, especially stability against Europe's anchor currency, the Deutsche Mark (DM). Higher levels of intra-European trade and investment increase the desirability of stabilizing exchange rates between European countries. Statistical evidence indicates that greater integration of goods and capital markets is associated with greater success in fixing national exchange rates against the DM. This implies that pressures for monetary integration will continue but will vary among countries, along with the degree to which they are economically linked to European trade and investment.