The Economics Book

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dealing with situations when
business cycles weren’t completely
synchronized across the region.
The most obvious of these would
be fiscal transfers—taking taxes
from one area enjoying growth
and redistributing to another in
recession. This last condition,
and the failure to implement it,
was to have grave consequences
for Europe.

Introducing the euro
The idea of a single currency for
Europe began taking shape in 1979,
when the European monetary
system (EMS) was formed to
stabilize exchange rates. Finally, in
1999, the eurozone (the area of the
single currency) was established
with 11 member states of the
European Union (EU). While EU
states traded heavily with each
other and their institutions had
removed restrictions on the
movement of labor, capital, and
goods, it was deemed necessary to

implement further constraints on

euro membership to ensure that the

currency could function effectively.

The “convergence criteria,”

enshrined in the 1992 Maastricht

Treaty, were drawn up to make sure

that all those countries wishing to

join the euro would share similar

economies and be at similar stages

in their business cycles (growth or

recession). The previous exchange

rate mechanism (ERM) had already

attempted to fix national currencies

against each other within the EU.

The euro went a step further,

removing all national currencies

and, in effect, permanently fixing

exchange rates. Important new

rules on government debt were

introduced. Under the stability and

growth pact of 1997, no country

was to have a national debt of

more than 60 percent of its gross

domestic product (GDP) and the

EXCHANGE RATES AND CURRENCIES

Robert Mundell Born in Kingston, Canada, in 1932,

Robert Mundell studied at the

University of British Columbia in

Vancouver before moving to the

University of Washington in

Seattle. He earned his PhD at the

Massachusetts Institute of

Technology in 1956. He was

professor of economics at the

University of Chicago from 1966–

74, when he moved to Columbia

University in New York.

Apart from his academic work,

Mundell has acted as adviser to

the governments of Canada and

the US, and to organizations

including the United Nations and

the International Monetary

Fund. Alongside his work

on optimal currency areas,

Mundell developed one of the

first models to show how

macroeconomic (whole economy)

policy interacts with foreign

trade and exchange rates. He

was awarded the Nobel Prize in

economics in 1999 in recognition

of his work on macroeconomics.

Key works

1968 International Economics

1968 Man and Economics

1971 Monetary Theory

Crowds gather in Frankfurt,
Germany, for the launch of the euro,
the single currency of the eurozone, on
January 1, 1999. For a while the euro
traded alongside national currencies.