The European Community countries appear to be locked into a process that may eventually lead their economies to full monetary unification. Although the road to monetary union in the EC is bound to be bumpy, all countries appear committed to the final goal, with the possible exception of Britain. According to plans under negotiation at the inter-governmental conference that started in December 1990, the currencies of twelve European economies, which include a number of leading international currencies such as the Deutschmark, sterling and the French franc, will ultimately be replaced by a new currency, likely to be called the ‘ecu’.

European monetary union, when and if it occurs, is bound to have important international implications. The new currency will be issued on behalf of a large economic area, by a new Central Bank which will be responsible for the joint monetary policy of the EC. Other international institutions such as the G-7, the IMF and the OECD will have to adapt (see Alogoskoufis and Portes, 1990), but, more importantly, there will be a major shock to the existing international monetary and exchange rate system. The ecu will be a serious challenger for the role of the US dollar as the dominant international means of payment, unit of account and store of value, and the monetary policies of the new European Central Bank will have far more important international spillovers than those of any of the existing central banks of the EC countries.