European Monetary System was established by European Community in 1979, to create European Currency Unit and Exchange Rate Mechanism which have been two pillars of European Monetary System. Recently European Community concluded Maastricht treaty to realize the economic and monetary union in three stages by the end of this century. The final goal of monetary union is to build European Central Banking System and to create a single currency which will replace all the existing national currencies. The purpose of this article is to clarify the impacts of liberalization of capital movement on the establishment of European monetary union. Under the financial liberalization, the success of stabilizing exchange rates depends upon the macro-economic policy coordination among member countries. There have been debates between "monetarists" and "economists" over the impacts of liberalization of capital movements on the stabilization of exchange rates. The "economists" argued that the abolition of capital controls jeopardize the success of stabilizing exchange rates. On the other hand, the "monetarists" insisted the commitment toward stable exchange rates become more credible with the liveralization of capital movements. With capital flow in late 1980s, the exchange rates among member countries had been more stabilized than in early 1980s. Liberalization of capital movements proved to be more conducive to the convergence of macro-economic policies among member countries. After the unification of Germany, however, exchange rates have fluctuated widely since Germany have pursued its own independent economic policies to cope with the new economic difficulties after the unification. At this moment, the prospects for monetary integration in EC is not so bright as expected in late 1980s. Success of the monetary integration in EC will depend upon whether EC can nurture necessary conditions for Optimum Currency Area.