Quantitative targets for exchange rates, without adequate convergence in the field of anti-inflation policy, are counterproductive. That applies above all to exchange rates between major currency areas. Exchange-rate targets are apt to lead to conflicts between external stability and internal objectives. And the financial markets perceive the vulnerability of such arrangements. That encourages, rather than curbs, speculation.
If the targets then fall, there may easily be more pronounced overshooting. Happily, these four lessons are included in the Maastricht Treaty. They form the foundation for today’s common currency, the euro. First, the Treaty gave European monetary policy the primary target of ensuring price stability.