The basic elements of the arrangement were: 1.The ECU: A basket of currencies, preventing movements above 2.25% (6% for Italy) around parity in bilateral exchange rates with other member countries. 2.An Exchange Rate Mechanism (ERM) 3.An extension of European credit facilities. 4.The European Monetary Cooperation Fund: created in October 1972 and allocates ECUs to members' central banks in exchange for gold and US dollar deposits.
Periodic adjustments raised the values of strong currencies and lowered those of weaker ones, but after 1986 changes in national interest rates were used to keep the currencies within a narrow range. In the early 1990s the European Monetary System was strained by the differing economic policies and conditions of its members, especially the newly reunified Germany, and Britain (which had initially declined to join and only did so in 1990) permanently withdrew from the system in September 1992. Speculative attacks on the French Franc during the following year led to the so-called Brussels Compromise in August 1993 which established a new fluctuation band of +15%.
In 1998 Europe introduced the Euro. This is another way of fixing exchange rates between member countries.
The EMS failed and the Euro is failing. For exactly the same reasons. They are two sides of the same coin.
Why? Because you cannot have fixed exchange rates between countries having so much different productivity. Exchange rates are determined by productivity differentials among countries.
In order to have a stable currency union like the USA, the countries/states must have very similar productivity. I have been saying this since 2003.
The country with the lowest productivity will always have the largest current account deficit and the weakest currency. The productivity differentials are too wide relative to the Germans. The Germans have to leave the union. It is the only feasible solution.
George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager
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