Frieden/IMPACT OF GOODS 195 Higher levels of capital mobility and intra-EU trade increase economic and political pressures for monetary integration.Closer links among EU financial markets heighten the trade-off between national monetary policy independence and exchange rate stability,forcing countries to choose be- tween them.More cross-border trade and investment within the EU expose more economic agents to currency risk and increase the demand to stabilize exchange rates.This effect is evident both over time and across country.As the EU has become more integrated,the demand for stable exchange rates has grown;and national support for monetary integration is correlated with national reliance on intra-EU trade and payments.The argument presented here grows out of,and is broadly consonant with,the economics literature on optimal currency areas and related macroeconomic policies. In section 1,I describe the history of attempts at European monetary integration.In section 2,I present various factors important in explaining European monetary politics,then develop my argument that the level of trade and capital market integration is a crucial determinant of currency policy.In section 3,I show how changes in the levels of intra-EU flows of goods,finance,and direct investment over time and across countries are correlated with Union-wide and national measures to reduce exchange rate variability.I conclude with some observations about the implications of this analysis for the future of monetary plans in the EU. 1.THE DIFFICULT COURSE OF EUROPEAN MONETARY INTEGRATION:FROM THE WERNER REPORT THROUGH THE EMS Fixing exchange rates between countries with different social,political,and economic conditions can be difficult.Although the determinants of exchange rates are still hotly debated among economists,there is little doubt that for the value of the currency of one country to be stable against that of another, the two countries'macroeconomic conditions cannot be too divergent.This is true,with varying degrees of stringency,whether the monetary integration in question involves simply stabilizing national currencies,or a more formal fixed exchange-rate system,or a single currency.In the case of the EU,in which the monetary anchor has long been Germany and the DM,monetary integration requires that other nations bring their macroeconomic conditions into line with those of Germany.This has typically meant reducing inflation, and-again,without entering the debates about this issuethe policies necessary to do so often have costs,typically involving recessionary mea- sures that increase unemployment and reduce real wages and consumption