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The Crisis in the EMS

Published online by Cambridge University Press:  28 March 2014

Andreas Busch
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Extract

After a Period of Stability of More Than Five Years, the European Monetary System (EMS) was forced into a series of realignments of the participating currencies' central rates in the months after September 1992. Following renewed turmoil on the currency markets in July 1993, on 2 August 1993 the ministers and central bank governors of the Community decided ‘to widen temporarily the obligatory marginal intervention thresholds of the participants in the exchange rate mechanism of the European Monetary System to ± 15 per cent around the bilateral central rates’. Although this measure was repeatedly emphasized as being ‘of limited duration’, as was the determination of some ministers to reach Monetary Union, these events have been designated as the ‘death’ of the EMS or its ‘breakdown’, and the Bank of International Settlements in its latest Annual Report called it ‘the most significant and far-reaching currency market crisis since the breakdown of the Bretton-Woods-system’.

Type
Articles
Information
Government and Opposition , Volume 29 , Issue 1 , 01 January 1994 , pp. 80 - 96
Copyright
Copyright © Government and Opposition Ltd 1994

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References

1 Technically speaking, most of this article deals with the Exchange Rate Mechanism (ERM) of the EMS. For reasons of simplicity, however, I shall refer to it mostly as the EMS.

2 Communiqué of the European Community, Brussels, 2 August 1993, reprinted in Deutsche Bundesbank, AuszÜge aus Presseartikeln (henceforth quoted as PA), Nr. 53, 3 August 1993, p. 1.

3 For a recent example of the first view cf. Hans, Tietmeyer, ‘Europäsche Währungs-und Kapitalmarktfragen’, printed in PA 73, 21 10 1993 Google Scholar, of the latter view cf. From here to EMIT, The Economist, 23 October 1993, pp. 29–31.

4 Giscard d’Estaing, ‘Krise all Beschleuniger’, DIE ZEIT, 8 October 1993; ‘Mitterrand: Wahrungsunion nicht verzögem’, Frankfurter Allgemeine Zeitung, 17 August 1993; No. 10 Downing Street press release, 2 August 1993, printed in Survey of Current Affairs, Vol. 23, No. 8, August 1993.

5 Here measured at imports as a share of GDP. Figures relate, unless otherwise noted, to 1987 and are from Giavazzi, Francesco and Giovannini, Alberto, Limiting Exchange Rate Flexibility: Tht European Monitor, System, Cambridge, MA, MIT Press 1989, p. 3 Google Scholar and author’s calculations from OECD statistics.

6 The creation of die EMS is described in detail in Ludlow, Peter, The Making of the European Monetary System, London, Butterworth Scientific, 1982.Google Scholar

7 Cf. e.g. Artis, Michael J. and Taylor, Mark P., Exchange Rates and the EMS: Assessing the Tract Record, CEPR Discussion Paper No. 250, 04 1988, London, CEPR 1988 Google Scholar; Susan M. Collins, ‘Inflation and the European Monetary System’, in Giavazzi, Francesco, Stefano Micossi and Marcus Miller (eds), The European Monetary System, Cambridge, Cambridge University Press, 1988, pp. 112–36CrossRefGoogle Scholar; Klein, Michael W., ‘The European Monetary System and European Integration: An Evaluation’, in Welfens, Paul J. J. (ed.), European Monetary Integration. From German Dominance to an EC Central Bank?, Berlin, Heidelberg etc., Springer 1991, pp. 53–73 Google Scholar; Weber, Axel A., ‘Reputation and Credibility in the European Monetary System’, Economic Policy, 12 04 1991, pp. 58–102 Google Scholar; Emerson, Michael et al., One Market, One Money. An Evaluation of the Potential Benefits and Costs of Forming an Economic and Monetary Union, Oxford, Oxford University Press, 1992, p. 71 Google Scholar, Table 3.5 and the literature survey in ‘The exchange rate mechanism of the European monetary system: a review of the literature’, Bank of England Quarterly Bulletin, February 1991, pp. 73–82.

8 A brief country-by-country account of these shifts in policy is given in Wayne, Sandholtz, ‘Choosing union: monetary politics and Maastricht’, International Organization, 47, Winter 1993, pp. 1–39.Google Scholar

9 This point is also stressed by David M. Andrews, ‘From ad hoc to institutionalized coordination and beyond: twenty years of European monetary integration’, Paper presented at the Inaugural Pan-European Conference of the ECPR, Heidelberg, September 1992, who speaks of the EMS as providing opportunities for ‘political blame management’: ‘High interest rates could be blamed on the Bundesbank, and coordination within the EMS could be justified in terms of its association with the cause of European integration more generally.’ (p. 19f.).

10 Woolley, John, ‘Policy Credibility and European Monetary Institutions’, in Sbragia, Alberta M. (ed.), Euro-Politics. Institutions and Policymaking in the ‘New’ European Community, Washington D.C., Brookings, 1992, pp. 157–90, p. 171.Google Scholar

11 Every exchange rate system must have such a nominal anchor, since exchange rates, by themselves, define only relative prices. This is known in the economic literature as the ‘N-1’ problem.

12 Cf. Siebert, Horst, Das Wagnis der Einheis. Eine wirtschaftspolitische Therapie, Stuttgart, DVA, 1992, p. 139ff.Google Scholar

13 Sandholtr, op. Cit., p. 5.

14 Figures for 1987 are taken from Dieter Hiss, ‘Geld- und währungspolitisch Implikationen einer Globalisierung der Finanzmärkte’, Wirtschafisdienst, II, 1988 pp. 71–78; Figures for 1991 are author’s calculations from United Nations Slatistical Yearbook, 1990–91, New York 1993 and Bank for International Settlements, Central Ban Survey of Foreign Exchange Market Activity in April 1992, Basel, BIS 1993.

15 Peter, Bofinger, ‘Der Name des EWS’, Wirtschefisiest, IX, 1993, pp. 454–57.Google Scholar

16 Cf. e.g. Giavazzi and Giovannini, op. cit.

17 Cf. Bank of England, op. cit.

18 The Economist, 7 August 1993, p. 21; John WooUey, op. cit, p. 188; WU1 Hutton, ‘The Chancellor, the Banker, and Deaf Ears in Bath’, The Guardian, 30 November 1992, p. 3.

19 Cf. Jochimsen, Reimut, ‘European Economic and Monetary Union: The Do’s and the Dont’s’, The World Today, 06 1993, reprinted in PA, 44, 1993, 25 06 1993, pp. 9–14, p. 13.Google Scholar

20 The Bundesbank’s independence from government and its obligation to pursue price stability, until recently only encoded in the Bundesbank Act, have recently even been set down in the Basic Law and now have constitutional validity.

21 The Austrian economist Erich Streissler has even analysed the D-Mark as being a European ‘public good’ provided by the Bundesbank. Cf. Erich Streissler, ‘Unsere goldlose Goldwänning’, in Graf von der Schulenburg, J.-M. and Sinn, Hans-Werner (eds), Theorie der Wirtschaftspolitik. Ftstsdtrifl zum fünfimdsitbzigsten Geburtstag von Hans Möller, Tübingen, Mohr, 1990, pp. 106–28.Google Scholar

22 For the following cf. Bank for International Settlement!, 63, Annual Report, Basel, 1993; The Economist, 14 August 1993, p. 68; John Ridding and David Buchan, ‘Between a Rock and a Hard Place’, Financal Times, 22 September 1993, p. 17.