196 Money and Finance
system implied. The principal strategy has been to seek stability through cooperative
regional agreements.
The most important of these regional monetary agreements is Europe’s
Economic and Monetary Union (EMU). In 1999 the members of the EMU
introduced a single currency, the euro, which has quickly gained a place as one
of the world’s three leading currencies. Charles Wyplosz, in Reading 17, describes
and analyzes the complex process by which most of the members of the European
Union gave up their national moneys in favor of a common currency. It is widely
believed that the EMU is simply part of a broader process in which the world
will tend to form itself into currency blocs around the dollar, the euro, and,
perhaps, the Japanese yen.
In international finance, the period since 1965 has been extraordinarily eventful.
The Euromarket has grown to several trillion dollars, and international banking
has become one of the great growth industries in the world economy. The recent
explosion of international finance is unprecedented. Net international bond and
bank lending amounted to $865 billion in 1997, having risen from just $245 billion
five years earlier. Capital outflows from the thirteen leading industrialized economies
averaged $677 billion in 1995, in contrast to $52 billion in the late 1970s; moreover,
today almost two-thirds of such outflows consist of portfolio investment while
only one-third is foreign direct investment, the reverse of twenty years ago. Indeed,
in the late 1970s, total global outflows of portfolio capital averaged $15 billion a
year, whereas between 1992 and 1995, they averaged $420 billion a year, a nearly
thirtyfold increase.
To put these annual flows in perspective, capital outflows were equivalent to 7
percent of world merchandise trade in the late 1970s but averaged 15 percent in
the 1990s. Likewise, in 1980, cross-border transactions in stocks and bonds were
equal to less than 10 percent of the gross domestic product (GDP) of all major
industrial countries, whereas today they are equivalent to more than twice the
GDP of the United States and Germany, and to three times the GDP of France
and Canada.
In addition, recent changes in regulations and technology have made it possible
for money to move across borders almost instantly, giving rise to massive, short-
term international financial transactions. By 1997, for instance, the total amount
outstanding of such short-financial “derivatives,” including those traded both over
the counter and on exchanges, was more than $40 trillion. Foreign exchange trading
in the world’s financial centers averaged more than $2 trillion a day, equivalent to
$2 billion per minute and to a hundred times the amount of world trade each day.^1
John B.Goodman and Louis W.Pauly (Reading 18) examine how recent changes
in international financial markets have made national capital controls obsolete
and produced among countries a remarkable convergence toward more liberal
international financial policies. In their view, based on the predominance of
international economic factors, increased capital mobility has overwhelmed the
kinds of national and group differences emphasized by domestic societal scholarship.
Postwar monetary and financial affairs have given rise to both academic and
political polemics. Developing countries especially have argued that the existing
systems of international monetary relations and international banking work to