DP1677 | The Indeterminacy of the Euro Conversion Rates. Why it Matters and How it can be Solved

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30/07/1997

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Abstract

The Maastricht Treaty and the Madrid Council decision severely restrict the choice of the euro conversion rates. In practical terms the authorities can only select the Ecu rates prevailing in the market the day before conversion. The market will lack a fixed point, however, so that infinite possible Ecu rates (and thus euro rates) could emerge. This indeterminacy problem is not solved by announcing fixed bilateral conversion rates in advance. The indeterminacy of the euro rates will spill over into an indeterminacy of the exchange rates of outside currencies with the EMU currencies (e.g. the dollar/DM rate). As a result, turbulence in these foreign exchange markets is likely during the approach to EMU. The emergence of speculative bubbles cannot be excluded. We discuss the possible solutions to this problem. They all involve steps towards providing an anchor in the foreign exchange markets.