The Euro Crisis from the Perspective of the Preceding Debates on Fixed versus Flexible Exchange Rates and the European Currency Union

The development of the European Monetary Union is related to Milton Friedman’s critique of the Bretton Woods System that started a vigorous debate about “fixed versus flexible exchange rates.” This paper briefly contrasts the arguments pro and con flexible exchange rates at this time. After the breakdown of the Bretton- Woods-System the exchange rate debate was replaced by a somewhat less vigorous discussion on the desirability and drafting of a European Monetary Union (EMU). Predictions of proponents and opponents of EMU are briefly described, and it is shown that specific investments of contractual parties play an important role that may invite ex post opportunistic behaviour of contractual parties – a central problem of the New Institutional Economics in the style of Oliver Williamson. Formation of “unified governance” (integration) is the adequate answer. However, to become a coherent economic unit based on strict and enforceable rules is a more complicated matter for the integration of states than for the integration of firms – because to work in the long term, EMU has to be a self-enforcing entity. That demands not only the transfer of formal sovereign powers to some centre but also its supplementation by informal or ideological European integration, i. e., by the achievement of some mutual consent among the inhabitants of Euroland regarding not least their attitude towards monetary and fiscal policy – so to speak as modern answer to the centuries-old problem of European Equilibrium – an ambitious target that can be achieved neither overnight nor easily.