Capital mobility and monetary adjustment in Western Europe, 1973–1991

The western European experience is perhaps the best known instance of formal exchange rate management and attempted monetary integration on a regional basis. This article examines the role of heightened international capital mobility in accounting for this phenomenon. The behavior of ten industrial western European states during the period 1973–1991 is analyzed in this regard. These states vary in terms of size, membership in the European Community (now the European Union), participation in the exchange rate mechanism of the European Monetary System, and their revealed policy preferences. Nevertheless, all ten states eventually accommodated German monetary policy in an effort to stabilize regional exchange rates around the deutsche mark. The pursuit of increasingly similar policies by states differing in non-trivial ways suggests that, at least by the end of the research period, the external constraint imposed upon each of them as a result of international financial integration had become severe indeed. Recognition of this constraint provides a basis for understanding the nature of the policy choices facing European monetary authorities. Nevertheless, heightened international capital mobility (in isolation from other factors) is found to provide an incomplete explanation of certain key features of the European experience. Suggestions for further research are proposed with this in mind.