Bank Supervision: The Real Hurdle to European Monetary Union
The turbulence in the European foreign exchange markets since the summer, culminating with the realignment of the Italian lira and then the withdrawal of the lira and sterling from participation in the exchange rate mechanism of the European Monetary System (EMS), has shifted attention from the ability of individual countries to meet the economic convergence conditions stipulated in the protocols to the Maastricht Treaty to the difficulties involved in transforming a system of rigidly fixed rates into a full European Monetary Union with a single European currency. Yet, there are other reasons, which have nothing to do with the behavior of the foreign exchange markets, nor the economic performance of national economies, that are likely to cause even greater difficulties to the process of monetary unification. One of the most important involves the mundane subject of bank supervision. While the EMS is a first step on the road to EMU, and economic convergence is a second step, as the Bundesbank has repeatedly pointed out, neither is necessarily a step on the road to a single European currency. The EMS, coupled with successful convergence, could lead to irrevocably fixed exchange rates and