DP385 | Financial Market Integration, Macroeconomic Policy and the EMS


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The new and prospective entrants to the EC join an economic environment that itself is undergoing rapid change. The combination of the European Monetary System (EMS) and the integration of European financial markets in 1992 will alter substantially the environment of monetary and fiscal policy in Europe. This paper reviews the constraints placed on macroeconomic policy and the remaining options, in a system that appears to be integrating with regard to monetary, but not fiscal, policy. We begin by noting that integration is taking place at a time when the countries in Europe have large and persistent current account imbalances, and discuss the conditions under which these will be automatically financed within Europe.