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Chapter 3 provides an analysis of international arbitrage focusing on the exchange market between Paris and London. Resting on a new methodology to study exchange rate relations, this chapter shows that exchange rates between gold and bimetallic nations were heavily influenced by bullion discoveries.

Few issues have caused as much domestic turbulence for so long in recent decades as those associated with Britain's role in the European integration process. EMU challenged traditional concerns of British policy on Europe: nationhood, sovereignty, and gradualism. It also conflicted with core Thatcherite policy beliefs about the sensitivity of monetary policy to market conditions. EMU appeared on the agenda as the Conservative Government wrestled with the question of ERM entry, and a cleavage appeared between ‘Europhiles’ and ‘Eurosceptics’. Mrs Thatcher was intent on asserting a more strident leadership on ‘Europe’, whilst her Chancellor was acting as a policy entrepreneur. Her government was thus ill‐prepared strategically for the EMU negotiations. After the surprise of the Delors Committee outcome, the Whitehall machine established tight policy coordination. Given the political context, however, it remained vulnerable to a narrowness of vision.

The national economy of Portugal was exposed to financial and political crises that proved to be recurrent, and an inflationary environment when Portugal became a member of the European Community in 1985. When Cavaco Silva became prime minister, he was able to secure a huge part of parliament in the general elections that occurred in 1987 and 1991. A multi-annual fiscal adjustment strategy (MAFAS) was employed since his government implemented certain reforms. While this measure could be associated with the ECU, the financial and political stability brought on by such measures continued through the efforts of the socialist party which articulated a commitment towards the Economic and Monetary Union (EMU). The escudo exchange rates and interest rates reflected the sustained convergence that was expected through the 1992 Treaty on European Union. This chapter looks into how multilateral measures for surveillance imposed by the ‘code of conduct’ of the Exchange Rate Mechanism of the European Monetary System (ERM) improved national credibility.

This chapter analyzes the concept of “fixer” and “floater” in classifying countries during the gold standard period. These terms, though archaic, have not ceased to be relevant, and are seen still to draw similar patterns in a small number of countries. The chapter mentions the research of Obstfeld and Rogoff, “The Mirage of Fixed Exchange Rates”, and cites the existence of a significant number of stable, meaningful exchange rate regimes that go against recent research. The chapter delves deeper into the history of fixed, floating and flipping exchange rate regimes in relation to the number of exchange rate spells and questions how these spells have survived, as well as how the reformation of pegs affect stability.

This chapter discusses exchanges and the different types of exchange rate regimes. It describes how exchange rates impact on real exchange rates, and how movements in the real exchange rate are associated with boom-bust cycles. It also discusses interest parity.

This chapter examines the condition of emerging-market and developing countries (EMD) in the midst of global financial crisis. EMDs experienced a surge in cross-border financial inflows, which suddenly ceased in 2008 after the collapse of Lehman Brothers. Capital flows were V-shaped, however, with the developing world experiencing a surge in financial flows once again in the wake of the crisis. Exchange rates appreciated, and many nations also feared subsequent asset bubbles. Much of the surge was a function of low interest rates and slower growth in the industrialized world and of faster growth and higher interest rates in key EMDs.

This chapter reviews some arguments on the appropriate management of capital inflow surges and examines, in particular, the conditions under which capital controls may be justified. A key conclusion is that if the economy is operating near potential, if the level of reserves is adequate, and if the exchange rate is not undervalued, then use of capital controls—in addition to both prudential and macroeconomic policy—is justified as part of the policy toolkit to manage the macroeconomic risks that inflow surges may bring. Such controls can moreover retain potency even if investors devise strategies to bypass them, provided such strategies are more costly than the expected return from the transaction.

This chapter looks at the strong global economic recovery which took place in mid-2004, which accelerated world trade growth to historically high rates—a special advantage to European nations who all rely heavily for their economic well-being on international trade. With improved trade opportunities, even the struggling German economy began to show signs of life. The Eurozone, however, had economic and financial vulnerability. A source of instability inherent to monetary unity was vividly manifest during the crisis of the European Exchange Rate Mechanism (ERM) in the early 1990s. A longer-term problem was the Eurozone's banks. Ultimately, the story of the next three years—between mid-2004 and mid-2007—revolves around a contest between the forces of “great moderation” and “irrational exuberance.” In the Eurozone, as member states benefited from an improving global economy, a belief in the European Central Bank's (ECB) distinctive ability to maintain stability reinforced the narrative of great moderation.

According to Article 127(1) TFEU, it is the core purpose of the European System of Central Banks (ESCB) (with the European Central Bank (ECB) at the top) to maintain price-stability within the European Monetary Union (EMU). It is this task that is usually referred to, where the ‘monetary mandate’ or the ‘monetary policy’ of the ECB is mentioned. However, though this monetary mandate is not only the most prominent but most certainly also the most disputed task of the ESCB–especially since the financial and euro crisis–it is by no means the only task transferred onto the ESCB (respectively the ECB) by the Member States. According to Article 127(2) TFEU, the basic tasks to be carried out by the ESCB in actual fact include the conduct of foreign-exchange operations and thus the ‘foreign policy’ relations of the euro area and the euro with other currency areas (mainly states) and currencies. When creating the EMU, however, it was highly disputed whether the ECB or the Council should be the competent authority to conduct or rather to decide on such operations.

In light of the recent financial and sovereign debt crisis, there is now a large consensus that something was fundamentally wrong with Europe’s Economic and Monetary Union (EMU). The original design clearly lacked institutional mechanisms to deal with financial and sovereign debt crises. It also under-estimated the fundamental message of the optimum currency area (OCA) theory that countries in a monetary union can be subject to asymmetric shocks and that occurrence of such shocks was likely to be high in EMU, at least during its early years, because of the heterogeneity of its members. This chapter proposes the creation of national and EMU institutional mechanisms to reduce the occurrence of asymmetric shocks in the future, and to make adjustment to such shocks smoother than it is currently.

The euro, when launched on January 1, 1999 should have had the staunch support of all the countries that joined the endeavor. However, despite having fought to secure the project’s fate and their countries’ qualification, Europe’s leaders gave the impression that the currency they had created was not really theirs when the European Central Bank took over responsibility for monetary policy in 1999. Most of the promoters of the common currency had hoped that it would lead to substantial changes in the distribution of competences, to strengthened economic governance and policy coordination, and common political institutions. Instead, the euro was born an orphan currency, having been forsaken by the greater European project that gave it meaning. Although the technical preparation and the transition to the new currency was flawless, many countries did not pay attention to their ability to function in a monetary union, and what this would require in terms of adapting economic policy.