also lower, of course. the degree of convergence tends to be higher with fixed but adjustable exchange rates. if there is, nevertheless, no adequate convergence, costs will depend on whether there is a timely realignment. if prompt action is taken, the consequences will be contained. by contrast, if the realignments take place only under pressure from the markets, high costs can easily arise - - not just for the country itself, by the way. a “ case ” like this can easily negate the credibility of a whole system or make the unilateral pegging of other countries - - even those in other continents - - more difficult. for that reason the fact that the alignment of the exchange rates in erm ii is to be made easier than in the present system is a positive development. it is to be hoped that this will prove its value in practice, too, in future. the choice of the exchange rate system must, at any rate, be consistent with the economic and political conditions which obtain in the participating countries. a mixed world monetary system - - with floating key currencies, on the one hand, and regional integration through monetary union and fixed exchange rates, on the other - - might not be the best of all hypothetical worlds. but that system is probably the one that corresponds most closely to conditions in the real world. it is not inherently a badly designed structure or a non - system. there can indeed be appropriate graduations of flexibility that are in line with the realities. ix. understandably, the question is now frequently being asked : “ what place will the euro take in the future world monetary system? ” the answer which is often given is the notion of a future tripolar system consisting of the dollar, the yen and the euro. that vision is, at least, not very accurate. if one wants to speak of a tripolar system at all, the weights in it will differ quite considerably. even now, it is becoming apparent that the yen ’ s potential relative to the other two currencies will, if anything, remain limited. at all events, in the foreseeable future it will probably lack the regional base in asia itself which the euro is likely to have in europe. but the euro will first have to earn its position. that is because an international currency essentially needs three properties : • • • a high level of lasting stability a strong base in the real economy and efficient financial markets. the euro has the potential to fulfil

at that time. the adjustments that were necessary given a change in competitive conditions - - which, naturally enough, primarily concern the private sector - - were spread comparatively widely over the major part of the economy. by contrast, the government ratio in many european countries nowadays is around fifty per cent or more. adjustment in line with market conditions is thus now concentrated - - more or less - - on half of the economy. prices and wages were also more flexible a hundred years ago ; at any rate, more flexible than they are now in the majority of countries on the european continent. and, above all, the government had a different perception of its own role. its core tasks at that time were to frame and protect the domestic legal system and to pursue national interests abroad. nowadays, in the eyes of citizens and the electorate, the nation state and the government have a much deeper and more general economic and social responsibility for growth, incomes and employment. it is, at any rate, very optimistic under present - day conditions to assume that monetary commitment by the monetary union and the supranational central bank would only have to be strong enough and that it would then be able to enforce any desired adjustment needs automatically. what should not be overlooked is that abiding by the rules of the game depends on countries having an adequate capacity to be correspondingly flexible, just as it presupposes the common political will to submit to those rules of monetary stability on a lasting basis. that far - reaching economic and political dimension of monetary union should not be underestimated - - precisely in the world of today and tomorrow. the abolition of the exchange rate is, at all events, an occurrence of far - reaching importance. ii. the exchange rate is a price ; one of the most important in an economy. like all prices, its prime task is to manage allocation. put in simple terms, this means that if the exchange rate is at a level which is appropriate to competitive conditions and if the fundamental determinants - - such as differences in the inflation rate and productivity or the conditions of demand - - remain largely constant, then the exchange rate can and should be as stable as possible, too. it is then that its information content is at its highest. and this also brings about a high degree of certainty in planning for economic arrangements. if, on the other hand, there is a change in the fundamental determinants, the exchange rate should realign as rapidly as possible - - unless an economy