Book Reviews Begg, David, Francesco Giavazzi, Jürgen von Hagen, and Charles Wyplosz. EMU: Getting the End-Game Right. London: Centre for Economic Policy Research, 1997. Pp. xiv, 75. £10; $14.95. Eleven of the 15 Member States of the European Union will be starting the grand experiment of economic and monetary union (EMU) on 1 January 1999; these are familiarly known as the Ins. Four other Member States have either decided not to participate - Denmark, Sweden and the UK - or have been found by the European Council not to be eligible - Greece; these are familiarly known as the Outs. The Maastricht Treaty (the Treaty) prescribes that on 1 January 1999 one Euro, the new currency of EMU, will be equal to one ECU, a basket of twelve currencies that includes nine of the Ins' currencies and three of the Outs' currencies. The ECU will then disappear. Furthermore, the conversion rates between the Euro and the Ins' currencies cannot be established before 1 January 1999 and 'shall by itself not modify the external value of the ECU' (Article 109l(4) of the Treaty). In setting down those provisions, the drafters of the Treaty were preoccupied with discouraging speculative attacks on the EMU. But, unintentionally, they created an 'indeterminacy' problem, which is the reason why EMU: Getting the End-Game Right was written. The conversion rate of any one of the Ins' currencies against the Euro will depend on its exchange rate against the eight Ins' currencies and the three Outs' currencies. The cited 'no modification' clause of the Treaty speaks of external value of the ECU. But which one? That of the currencies not included in the basket, that of the Outs' currencies, or simply of all currencies? The all-inclusive definition fits best with the objectives of the Treaty's drafters. This interpretation, in turn, implies that not only the French franc and the German mark (two of the Ins' currencies), but also the British pound (one of the Outs' currency) and the US dollar (one of the 'external' currencies) rate of the ECU cannot change from the closing quote of 31 December 1998 to the opening quote of 4 January 1999 (the first trading day of 1999). One way to satisfy this requirement is to let all 12 ECU currencies maintain a constant dollar exchange rate from 31 December 1998 to 4 January 1999. Interventions by the 12 European monetary authorities can theoretically achieve this result. But the three Outs represented in the ECU would have no incentive to do that. Nor would the Ins want to rely on the good will of the Outs to satisfy the 'no modification' clause of the Treaty. More importantly, the financial markets would be left guessing what those 31 December 1998 exchange rates will be, an uncertainty that will not serve well the EMU's kick-off. Ins, having been freed from the straitjacket of entry criteria, will have incentives to start the final stage of EMU with a more competitive exchange rate than their partners': this is the end-game problem. To overcome these difficulties, the authors of the monograph propose that the European Council announce, together with the list of the Ins, their bilateral conversion rates. The announcement will act as a pre-commitment mechanism and as an anchor to the year-end exchange rates. It would also go a long way towards meeting the 'no modification' clause. A degree of uncertainty would still remain to the extent that the ECU includes Outs' currencies whose rates against the ECU cannot be pre-committed. Much of what the authors propose has already been adopted by the European Council in their 2 May 1998 declaration. This is an attestation of the importance of the problem and the practical relevance of the authors' advice. Michele Fratianni Kelley School of Business Indiana University
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