The financial markets are more optimistic than ever about the prospect of a broad Emu arriving on schedule. That is the verdict of the JP Morgan Emu calculator. The calculator is an analytical tool that reveals the market's view of the probability of individual countries joining Germany in a monetary union.
It has become very popular, gracing the desks of central bankers, investors and corporates. Its principal innovation is that it estimates expectations in real time. Users can see, blow-by-blow, the impact of political and economic events on market expectations. Being real-time, the calculator has generated a wealth of data that enable us to analyze the Emu process in ways not previously possible.
The Emu calculator derives market probabilities from the forward interest rate swaps market, in which investors swap future floating-rate interest payments for fixed-rate ones. The market's view of the probability of Italy participating in Emu in 1999, for instance, can be derived by comparing today's actual post-1999 spread between lira and Deutschmark swap rates, the zero level implied by Emu and the level to be expected if Italy did not participate in Emu.