The establishment of the euro represents an important step in the creation of an integrated European economy. Over time it should yield dividends as increased competition and lower transaction costs generate increased efficiency. However, member countries have had to give up their own exchange rates and interest rates, which has created problems for economic management by reducing the number of policy instruments. In particular, the European Central Bank (ECB) must wrestle with how to set interest rates when some countries are booming, while others suffer high unemployment. Asset based reserve requirements (ABRR) can fill this policy instrument gap. (more…)