Rules and Institutions in International Monetary Systems

In its present form, the eurozone is without precedent in the history of the civilised world. There has never been an economic and monetary union of a group of countries without a simultaneous movement towards political union, although a number of attempts have been undertaken to secure the greater predictability that a fixed exchange-rate regime can provide, the aim being to reduce exchange-rate risk and hence promote trade, investment and ultimately economic growth. The most successful fixed rate regimes, the classical gold standard and Bretton Woods, each helped to establish an international economic environment that facilitated decades of economic expansion, before a combination of political and economic factors forced their ultimate termination. However, a badly constructed fixed exchangerate system — such as the 1920s return to the gold standard on pre-First World War parities or the United Kingdom’s experience of ERM membership at too high a parity — has been associated with economic recession, bankruptcies, housing price collapses and mass unemployment. Consequently, whilst a properly constructed system can be a benefit to participating countries, a badly designed regime can cause its members untold damage. The importance of this point is reinforced by the fact that eurozone membership is intended to be an irrevocable act, with the TEU deliberately failing to specify a means by which a member state might exit the arrangement in the future. It is intended to be a one-way shift towards further economic integration. Consequently, even greater emphasis is placed upon the estimated balance of costs and benefits by which a country decides whether or not to participate in this unique currency arrangement.