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Kyriazis, N. The Drachma’s Adhesion to the European Monetary System Possible Effects. Credit and Capital Markets – Kredit und Kapital, 18(4), 504-514.
Kyriazis, Nicholas K. "The Drachma’s Adhesion to the European Monetary System Possible Effects" Credit and Capital Markets – Kredit und Kapital 18.4, 1985, 504-514.
Kyriazis, Nicholas K. (1985): The Drachma’s Adhesion to the European Monetary System Possible Effects, in: Credit and Capital Markets – Kredit und Kapital, vol. 18, iss. 4, 504-514, [online]


The Drachma’s Adhesion to the European Monetary System Possible Effects

Kyriazis, Nicholas K.

Credit and Capital Markets – Kredit und Kapital, Vol. 18 (1985), Iss. 4 : pp. 504–514

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Nicholas K. Kyriazis, Luxembourg


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The Drachma’s Adhesion to the EMS

The present paper examines the possible effects on a previously floating currency of a small open economy of joining a currency area with predominantly fixed exchange rates, such as the European Monetary System, taking the Greek drachma as an example.

Economic policy objections that could be raised against participation to the EMS are examined and criticised:

1. “Loss of independence in the shaping of economic policy when abandoning flexible exchange rates, which could have a negative influence on employment and competitiveness.” The validity of this argument rests on the existence of anormal Phillips relation which actually does not exist. Expansionary monetary policy is not an adequate instrument to reduce unemployment. Furthermore, the autonomy of economic policy is constrained by the size and openness of the economy and is not dependent on the exchange rate system.

2. “Relatively fixed exchange rates could impose a constraint on the balance of payments.” Flexible exchange rates, while not solving the balance of payments’ constraint, fully transmit the shock of external disturbances to domestic inflation. Moreover, devaluation may not improve the balance of payments, since the negative effect on inflationary expectations often leads to an outflow of capital.

3. “Flexible exchange rates that permit lax monetary policies are preferred by governments due to the existence of an ‘inflation tax’.” This is an abuse of the State’s monetary monopoly and is inacceptable in a democracy.

Relatively fixed exchange rates that would prevail in the case of the drachma’s adhesion to the EMS are seen as one element in a general stabilisation policy and the fight against inflation. The cost of such stabilisation is only transitory compared to the alternative permanent inflation cost. The success of such a policy depends to a great extent on wage behaviour so that some sort of accompanying incomes policy would be desirable.