Pegging To The Dollar And The Euro

Abstract

The newly-launched euro is bound to attract some "trackers"- that is, countries that attempt to maintain exchange rate stability against the euro. In this paper, we ask whether the existence of trackers should be a matter of concern for the European Union. To gain some insight, we review the historical experience of the US with respect to dollar trackers. We identify and analyse the countries most likely to track the euro. Although the aggregate size of potential euro-trackers is small relative to the euro zone, we argue that this does not justify an attitude of benign neglect. Rather, we make recommendations for EU policy towards euro-trackers, arguing in favour of some limited and conditional support for stable bilateral exchange rates.