The European exchange rate mechanism and the European monetary union

Summary This article addresses two central questions related to the prospects of the Economic and Monetary Union (EMU) in Europe: first, is the current exchange rate mechanism viable in the transition stage to EMU or in the period to come if the EMU should be postponed? Second, is a monetary union necessary in an economically fully integrated European Union or would the current or an alternative exchange rate mechanism suffice an integrating Europe? The article reviews the arguments for and against monetary union, the history of European monetary integration, the theoretical and empirical insights into the functioning of targets zones, and the likely developments and prospects for the EMU.The author wishes to thank Martin M.G. Fase and Simon K. Kuipers for their most helpful comments on a previous version of this article.