European Monetary Upheavals.

• Author: Moersch, Mathias

After several years without significant exchange rate realignments and only months after the signing of the Maastricht Treaty on Economic and Monetary Union (EMU), severe problems developed in the European monetary system (EMS) in the early 1990s. Uncertainty about the political feasibility of EMU and a divergence in economic fundamentals led to the perception that the EMS had become unstable. As a consequence of speculative pressure a number of member countries were forced to devalue their currencies and Italy and the United Kingdom left the EMS in September of 1992. The idea of narrowly controlled exchange rates was finally abandoned in August 1993, when the bands of the exchange rate mechanism were drastically widened from 2.25% to 15%.

European Monetary Upheavals, the outcome of a conference held in December 1993 at the London Business School, evaluates these developments. The first three essays describe the currency crises and suggest possible explanations. The next three papers are single country studies, covering the French, German and British experiences. Chapters seven through nine discuss implications for the future course of monetary integration. The book closes with a panel discussion about the future of European monetary integration.

This well balanced volume, which brings together both supporters and opponents of EMU, convincingly explains the crises as a combination of fundamentals, policy actions, and speculative attacks fueled by expectations. The country study by Jacques Melitz in particular, sheds new light on the attacks on the French Franc. The book also maps out several options for resuming the move towards EMU. A shortcoming of the volume is the lack of a thorough treatment of the costs and benefits of EMU. While several authors briefly address this issue, a separate chapter would have been worthwhile.

After an editorial introduction by David Cobham, William Branson analyses the effects of German unification on EMS in a two-country model of real interest rates, the real exchange rate, and the current account. He argues that German unification led to an (initial) real appreciation of the DM, which requires either a nominal appreciation or a change in relative prices. EMS countries rejected a nominal appreciation of the DM and instead maintained their exchange rates, forcing higher interest rates and currency appreciation versus countries outside the EU (European Union) on their economies. At the same time, inflation...