Is a Two-speed System in Europe the Answer to the Conflict between the German and the Anglo-Saxon Models of Monetary Control?

The Treaty of Maastricht requires that by 1 January 1999, at the latest, there shall be a nucleus of a monetary union. The issue of monetary union must therefore rest on the presumption that a small ‘credible’ group of countries that fulfils the convergence criteria will be able to adopt a single currency, while the remaining peripheral countries will continue to use their national monetary instrument until monetary convergence is attained. In this paper we accept the core/periphery distinction as given and evaluate the conditions under which it is sustainable. We approach the issue through the literature on optimal currency areas and concentrate on the importance of countries hit by symmetric shocks of similar size. We adopt the Bayoumi and Eichengreen methodology of examining correlations of shocks within and between groups and discover that, while the split as is currently understood may be justified, the core is no more an optimal currency area than the periphery. A monetary union based on strict monetary rules, as implied by the German model of monetary control, is better applied to a much narrower range of countries than the core currently includes; extending the union beyond that narrow set under German-style monetary controls would be to create a very fragile union held together by other types of compensating stabilization policies.