Getting to Yes (Again) with Germany
GENEVA – Europe’s slow-motion sovereign-debt crisis may appear unique, but it is not. Just a few decades ago, Europe had the Exchange Rate Mechanism, which collapsed during a crisis very much akin to the one afflicting Europe today. Will the outcome this time be different?
The ERM was an arrangement that pegged most European currencies’ exchange-rate movements within limited bands. But ERM members’ monetary policies remained home-grown, which, no surprise, occasionally led to fiscal imbalances. When capital markets smelled a problem among ERM members, they invariably shorted the most vulnerable currency and pushed that country’s authorities to devalue. Authorities resisted, blamed speculators, and then, usually over a frantic few days, gave in.
Markets also tested the resolve of policymakers in otherwise sound ERM countries, particularly when there were big strikes or important elections. In those cases, even a government with the proper economic fundamentals and its financial house in order could still run into trouble. European Central Bank President Jean-Claude Trichet is well aware of this: in the early 1990’s, he confronted such a crisis as Governor of the Bank of France.