A Common Currency Route to EMU: The Hard ECU Revisited

In the event that the Maastricht approach to monetary union breaks down, which could happen for a variety of economic and political reasons, EU governments will be under pressure to find a convincing alternative route to monetary union. A viable way forward could be found by reviving the ideas for a common currency embraced by the UK Government in 1990. That approach involved the introduction of a new currency for Europe known as the "Hard Ecu", which would be as strong as the strongest existing EC currency by virtue of its "no-devaluation" guarantee, implemented through the narrow-band Exchange Rate Mechanism then in force. In the event, the Hard Ecu scheme was rejected, although not for the best of reasons. Although with hindsight it can be seen that the scheme contained flaws, these could be remedied in the light of subsequent experience. In particular, the "no-devaluation" guarantee should be replaced by putting the Hard Ecu on a consumer commodity standard. The ECB should then be set up to issue the Hard Ecu/Euro to circulate alongside national currencies and eventually replace them. This would mean adandoning the convergence criteria and "irrevocable locking" of exchange rates, but much of the institutional framework of Stage 3 could be retained. A redesigned common-currency approach would offer a more credible and less accident-prone route to EMU than the Maastricht approach.