204 COMPARATIVE POLITICAL STUDIES/April 1996 3.TRADE,FOREIGN INVESTMENT, AND EUROPEAN MONETARY INTEGRATION European monetary integration is a complex phenomenon involving developments at the international,regional,and national levels,in both political and economic spheres.I do not pretend to present a full explanation of the process,only to outline a factor I regard as crucial,the importance of trade and investment ties for monetary integration.This is not,in other words, an argument that this variable is the only one that matters. I believe that increased levels of intra-European trade and capital flows played a major role in leading EU members toward monetary integration.I also believe that those EU members whose economies were more integrated with that of Germany,the monetary leader of the Union,were more likely to pursue monetary integration. To analyze the relationship between economic integration and exchange rate policy,it is useful first to present some summary measures of the currency movements observed in the period in question.Two measures of exchange rate variability are presented in Table 1.Panel A shows the average rate at which each currency in the EU,and in four countries not then EU members, depreciated in nominal terms against the DM during the snake (1973-1978), the EMS (1979-1993),and over the two periods combined (1973-1993).I also show two subperiods of the EMS,from 1979 through 1989,and the crisis years between 1990 and 1993.Panel B presents the coefficient of variation (multiplied by 100)of each EU currency against the DM during all these periods.The coefficient of variation is the standard deviation divided by the mean;in this instance,I use the standard deviation of quarterly rates against the DM and the mean rate over each period.This provides a standardized measure of variability of each exchange rate for the period in question For ease of exposition,the countries are divided into four groups.Hard- currency countries are those that stayed in both the snake and the EMS. Soft-currency countries are those that left or never joined the snake,and whose participation in the EMS has been limited or troubled.The two inter- mediate countries,France and Ireland,left the snake but have been relatively stable members of the EMS.The non-EU members are the European Free Trade Association countries for which data were available(that is,excluding Switzerland and Iceland);since 1993,of course,all of them except Norway have entered the EU. Differences among the countries are clear from both statistical measures used.In addition,a general trend to reduce annual average depreciations can be noted between the snake and the EMS,as is to be expected.The only slightly anomalous case is that of sterling,which appears more stable against