The Maastricht treaty sets out elaborate criteria that countries have to meet before they can participate in a single currency, but it also allows those European Community countries in the slow lane to stop the rest from going ahead before 1999.
Last week's currency turmoil shows that an inflexible ERM is vulnerable. It would be easier either to go backwards to a more flexible link, or onwards to a single currency. For the French government, the temptation will be to press for revisions in the Maastricht treaty, and move onwards quickly.
We may then be looking at a franco-mark for north-western europe - taking in Germany, France, Belgium and the Netherlands - forming a new currency against which others would float. Eventually, other countries might join if they met similar stringent conditions to those laid down in the Maastricht treaty, and on which the Germans are likely to insist.
There are two fundamental political reasons why the French will want to persist with a single currency. The first is their desire to bind Germany into western europe: integration is the guarantee against nationalist frictions. The second is that the current monetary arrangements - a franc linked to the mark within the ERM - means that the French effectively have to accept Germany's monetary policy.
There are also deeper economic reasons for a single currency: money is a convenience, and it is highly inconvenient for European countries which do so much business with each other to use separate currencies. That inter-dependence is the main reason why the Europeans have been keen to stop their currencies yo-yoing against each other.
A single currency would allow prices to be compared more easily across countries, encouraging bargain-hunting and trade. By eliminating the risk that devaluations could reduce the profits of an investment in another country, a single currency would probably also encourage cross-border investment.
During the gold standard before the First World War - the last period when businesses really believed that their currencies would not move out of line with each other - international investment was far higher than it has been even recently.
Economic and monetary Union (EMU) would also give the Europeans a world currency that others would want to hold as a store of value and means of exchange. In effect, Europeans would be able to print money for which non-Europeans would be prepared to pay with goods and services. This advantage, together with savings in the amount of foreign currency reserves needed by each country, could amount to hundreds of dollars per person.
There has also been increasing scepticism among economists about the advantages of separate currencies, particularly in closely integrated Europe. As a way of boosting output, devaluations were increasingly regarded as ineffective because they were so rapidly negated by the rise in import prices, inflation and wages. They purchased a temporary rise in output at the expense of a permanent rise in inflation.
The integration of Europe's economies has also meant that a shock is less likely to hit one national economy at the expense of the others. If European countries were very specialised in particular industries, there would be a strong argument for separate currencies as a way of pricing them back into work if the demand for their goods falls. But most European economies produce a similar range of goods.Reuse content