Impact of Exchnage Rate Regime in EC

Impact of Exchnage Rate Regime in EC

THE IMPACT OF THE EXCHANGE RATE REGIME ON INFLATION AND PAYMENT BALANCES WITHIN

This research examines the impact of the monetary exchange rate regime on inflation within and payments balances among the member states of the European Communities (EC). The EC is an umbrella name for a broad spectrum of organizations linking most of the nations of Western Europe. The exchange rate regime is the essential aspect of the functioning of the European Monetary System (EMS), which is one element in the structure of the EC. In effect, this research is a partial assessment of the EMS.

Formation of the European Community, and of European Monetary System

Within the context of international regional integration, there are five levels(1) freetrade area, (2) customs union, (3) common market, (4) economic union, and (5) political union (Grosse, & Kujawa, 1988). Each successive level involves a greater degree of integration. At the lowest level of integration, the freetrade area, tariffs are eliminated on the trade between the member countries. At the next level, the customs union, common external tariffs are applied to all trade between the member countries and non member countries. The third level, the common market, moves one step further along, and permits the free flow of the factors of production among member countries. At the fourth level, economic union, monetary and fiscal harmonization among member countries is added to the common market system. The final level, political union, involves the creation of a single government over all member countries, and the loss of national identity for the individual member states of the union.

The European Economic Community (EEC) was created with the signing of a treaty in Rome in 1957, by Belgium, France, the Federal Republic of Germany (FRG), Italy, Luxembourg, and the Nederlands (Paxton, 1990). The European Atomic Energy Community (EURATOM) was created at the same time, by …

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