Editorial
In this study Prof. Marc Flandreau takes the historical example of the currency union between Austria and Hungary (1867 to 1914) to compare it with the future prospects and the likely consequences of the European Monetary Union. The „Compromise“ between Austria and Hungary (1867) has established a single currency system, in which the monetary policy was conducted by a common central bank while each part of the monarchy remained sovereign in fiscal matters. At the same time no equivalent to the „Pact on Stability and Growth“ existed and the two countries could run (at times rather large) deficits to the extent of the public’s willingness to lend to them. The author shows that this control was sufficient in order to induce budgetary discipline over the medium run, to create incentives for monetary stability and to secure the continuation of the monetary union. This process has led to an increasing importance of the central bank, to a standardization of debt instruments and to a general competition about reputation between both parts of the monarchy. Prof. Flandreau concludes: „If there is one Austro-Hungarian lesson for Euroland, it is that behind the role of formal mechanisms to limit the recurrence of excessive deficit, the market does undoubtedly provide a second line of defense for monetary stability.“