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The International Monetary System: Is the Euro a Bulwark against «Foreign» Monetary Crises?

European Union Studies Center, City University, New York, 4 May 1999, 05.05.1999

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The message of Georg Rich's speech is not exciting at all: There are no simple remedies for preventing contagion by monetary crises occurring in other parts of the world. If the authorities are to keep the risk of contagion within bounds, they must above all conduct sound macroeconomic policies. Good macroeconomic management provides two benefits: It immunizes countries to a large extent against adverse external shocks. Good macroeconomic management also widens the authorities’ room for maneuver in offsetting the detrimental effects on the domestic economy of external shocks.

The advent of the euro has opened up the opportunity of strengthening the European Union’s commitment to sound economic policies. Considering its mandate for maintaining price stability, the European Central Bank will provide a strong impetus to the conduct of sound economic policies in Europe. However, the ECB will face a difficult task: It must chart its policy course in new and unknown waters. Moreover, it will face various obstacles complicating its task, in particular, fragile public finances and inflexible labor markets in many countries of the euro area. If the ECB succeeds in fulfilling its stability mandate, the euro will not only become a bulwark against external shocks, but also a source of stability for the rest of the world.