Snakes and ladders

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THE desire for currency stability in Europe dates back many decades, at least as far as the 19th-century Latin Monetary Union comprising France, Belgium, Switzerland, Bulgaria and Greece. From 1944 to 1973 stability was supplied by the Bretton Woods system of fixed exchange rates. When Bretton Woods was breaking down in the 1970s the Europeans devised a new system called the “snake”. Participants’ rates were fixed more rigidly than Bretton Woods required. But by the time of the snake’s launch in April 1972, rising inflation made it a sitting target for speculators. Britain barely joined before being forced to let its currency float (ie, sink). Denmark did likewise. Italy went soon after. France left in 1974, returned, and left again.

By 1976 the snake consisted of Germany, the Netherlands, Belgium, Luxembourg and Denmark, with Sweden and Norway as “associates”. It was, in effect, a D-mark block: Germany accounted for the bulk of the group’s GDP and the only significant world currency. The Bundesbank was proving itself the economic power in Europe—a chastening realisation for France, which had long imagined itself the senior member of the Franco-German partnership.

In 1979 the snake was succeeded by the European Monetary System, brainchild of the French president, Valéry Giscard d’Estaing, and the German chancellor, Helmut Schmidt. France wanted the EMS tied into the institutional regime of the European Community, making exchange rates “part of the Community horse-trading game, allowing France’s political weight to come to bear”, in the words of Bernard Connolly, a former EU official. The Bundesbank’s power would be curbed, just a bit.

The formal members of the EMS included all member countries (though Britain, characteristically, declined to join fully until 1990). There were plans for a “European Monetary Fund”, and for a pooling of national reserves. The EMS has left another legacy to the euro; it measured exchange rates against a synthetic “basket” currency, the ecu, which acquired an existence of its own in the bond markets. When Europe’s leaders confirmed their plans for the euro, they duly agreed that, on December 31st 1998, it should be set one-to-one with the ecu.