The Euro Crisis (4) : From the Perspective of the Preceding Debates on Fixed Versus Flexible Exchange Rates and the European Currency Union

The development of the European Monetary Union is related to Milton Friedman's critique of the Bretton Woods System that started a vigorous debate about “fixed versus flexible exchange rates.” This paper contrasts briefly the arguments pro and con flexible exchange rates at this time. After the breakdown of the Bretton-Woods-System the exchange rate debate was replaced by a somewhat less vigorous discussion on the desirability and drafting of a European Monetary Union (EMU). Predictions of proponents and opponents of EMU are briefly described, and it is shown that by entering EMU, sovereign states become mutual hostages and Williamson's problem of transaction cost economics arises. Formation of “unified governance” (integration) is the adequate answer. However, to become a coherent economic unit based on strict and enforceable rules is a more complicated matter for the integration of states than of firms - because in Western style democratic constitutional states, legal enforceability of international contracts requires the majority will of the individual members (constituents) of contractual parties (states) to follow their representatives agreed upon “strict and enforceable” rules. Question is how to repair EMU after the horse has bolted