EU Economic and Monetary Integration in the Age of Global Finance

Abstract

This chapter explores the relationship among three dynamics that featured in the political economy of European unification during the 1980s: the history of monetary unification among the EEC members’ economies, the liberalization on capital movements, and the larger transformation that featured in the international financial markets. It focuses on the years from prior to the Single European Act (1986) to the turn-of-the-decade. The primary aim is to account for the relationship between the EEC’s removal of control on capital movements and exchange restrictions, and the intensity in transnational capital flows in the new international financial environment of the early 1980s. Second it shed light on the linkage between this liberalization of financial markets, the process of European monetary alignment and exchange rate stability, and the macroeconomic dynamics that some European countries experienced from the late 1980s to the 1990s. After outlining the scale of international capital mobility, the chapter highlights how the liberalization of capital movements were used within the EEC during the decade. Thereafter it focuses on the late 1980s macroeconomic issues faced by many EEC countries: volatility in interest and inflation rates, growing current account deficit, and declining competitive position in foreign markets. It finally stresses the ill-functioning of a strategy to strengthen European economic integration based on the combination of exchange rate stability, domestic growth, and competitiveness financed through private capital flows, which led to the crisis of the EMS, interest rates manipulations, and interventions in foreign exchange markets at the start of the 1990s.