JOURNAL OF ECONOMIC DEVELOPMENT Volume 24, Number 2, December 1999 113 Capital Account Liberalization, the European Monetary Union and the Stability of the International Monetary System Harilaos Mertzanis * 1 Capital mobility affects the pattern of trade flows between countries, determines profitability and income distribution and thus shapes the pattern of overall economic growth. Capital mobility is central in the economic concerns of EMU and constitutes a major point of reference by all students of the functioning of the international monetary system and its prospective transformations. It is ultimately a core element in understanding the sources of economic and financial instability both on a domestic and an international scale. The paper argues that, given the experience of the previous monetary regimes, it is a rather very optimistic conclusion to expect that the current design of European and international monetary institutions as well as the current restructuring policies of the Asian economies will guarantee the smooth and uninterrupted operation of the different economies systems participating in the world arena. It is argued that economic stability and growth for individual countries as well as the smooth operation of the international monetary system will be better secured if there will exist a proper coordination of domestic and international policies and institutions, which will place a great deal of emphasis on a proper regulation of capital movements on a global scale. I. Introduction The growth of international financial transactions and international capital flows is one of the most far-reaching economic developments in the late twentieth century and one that is likely to extend into the twenty-first century. Net flows to developing countries tripled, from roughly $44 billion a year in 1984-89 to more than $204 billion in 1996, before declining in the wake of the Asian crisis. Gross flows to developing countries have grown even more dramatically, rising by 1200 percent between 1984-88 and 1989-94. During those periods, an increasing number of countries have removed restrictions on capital account transactions in an effort to take advantage of the alleged opportunities afforded by this remarkable rise in international financial flows. More generally, international capital mobility and its implications for trade flows, income distribution and growth has become a main point of reference by all theoretical considerations of the factors determining international development and economic convergence among regions. The issue of capital movements and their regulation was central in the efforts to explain the behavior of the European Monetary System (EMS) * Department of Research, Capital Market Commission, 1, Kolokotroni and Stadiou streets, 105 62 Athens, Greece.