Frieden IMPACT OF GOODS 203 As economies become more open on current and capital account,more economic agents develop cross-border trade and investment interests.Those involved in cross-border investment,traders,and exporters of specialized manufactured products all tend to favor exchange-rate stability to reduce the risk associated with their business interests in other countries.In this way, whatever the effects of economic integration on efficiency considerations associated with monetary union,it is likely to increase domestic political pressures for monetary integration.3 In some ways,it is hard to distinguish national from subnational(group) factors in this analysis.Although current levels of intra-European trade and investment may not be high enough to make currency union economically efficient,the national welfare gains are certainly higher (or the losses smaller) than they would be in less integrated economies.So the likelihood that EU members will undertake monetary integration is greater the more economi- cally integrated they are,both for broad national reasons and for the sorts of domestic-group reasons discussed above.A more detailed analysis would be necessary to differentiate fully between the two forces;this article simply presents argumentation and evidence that is consonant with either. Economic integration should increase pressures to stabilize exchange rates.Financial integration heightens the trade-off between exchange-rate stability and monetary independence.Integration of trade and investment makes the region in question more likely to meet the criteria for an optimal currency area.Whatever the social welfare implications of these trends,at a domestic political level,economic integration swells and strengthens the ranks of those who favor currency stability. The positive relationship between goods and capital market integration and the economic and political desirability of monetary integration should hold over time and across countries.As countries in and around the EU have become progressively more integrated on current and capital account,I expect interest in monetary integration to grow.By the same token,I expect support for monetary integration to be stronger in those countries with higher levels of intra-EU trade and investment.In the section that follows,I present evidence about the relationship between currency policy and the level of economic integration in Europe. 13.Again,the nuances are important.Most developing countries are quite trade-open,but exporters typically do not favor a fixed exchange rate.This is normally because the exports in question are either commodities or standardized manufactured products for which price com- petitiveness is paramount.The ability to maintain or restore competitiveness by way of devaluation,in these circumstances,tends to outweigh whatever advantage exchange-rate predictability may hold.In the EC,however,almost all exports are of specialized manufactured products.I have dealt with these issues in a more general context in Frieden (1994a)