The European Monetary System was established by the European Council on December 5, 1978, and was formally established on March 13, 1979. Its essence is a fixed and adjustable exchange rate system. Its operating mechanism has two basic elements: one is the currency blue sub-European Currency Unit (ECU); the other is the lattice system-the exchange rate system. The European Currency Unit is a basket of currencies composed of the currencies of the 12 member states of the European Community at that time, and the proportion of the currencies of each member state in it is determined by their respective economic strengths. The exchange rate system of the European Monetary System is centered on the European Currency Unit, which links the currencies of member countries to the European Currency Unit, and then uses the European Currency Unit to make the currencies of member countries determine bilateral fixed exchange rates. This exchange rate system is called the lattice system, or parity network.
The determination of the European monetary unit itself is pregnant with certain contradictions. The strength of the member states of the European Community is not fixed. Once it changes to a certain extent, the weight of the currencies of each member state is required to be adjusted. Although it is stipulated that the weights will change every five years, if the changes in strength are not detected in time, or the changes in strength are not detected in time, or the adjustments are not found in time, the market will make adjustments spontaneously, which will make the European monetary system. Crisis erupted. The most serious currency crisis since World War II occurred in the European currency market in mid-September 1992. The fundamental reason was that the increase in Germany’s strength broke the balance of power within the European Community. At that time, the economic strength of Germany was greatly enhanced by the reunification of East and West Germany. Although the share of the German mark expressed in marks in the European currency unit was not paid, due to the increase in the exchange rate of the mark against the US dollar , the relative share of the mark in the European currency unit continued to increase. Because the European currency unit is the unit of account for the exchange of goods and services and capital flows in the member states of the European Community, the change in the value of the mark or the German monetary policy can not only affect the macro economy of Germany, but also affect the macro economy of other members of the European Community. have a greater impact. The British and Italian economies have been sluggish, with slow growth and rising unemployment. They need to implement low interest rate policies to reduce corporate borrowing costs, allow companies to increase investment, expand employment, increase production, and stimulate household consumption to revive the economy. But at that time, after the reunification of East and West Germany, there was a huge deficit in finance. The government was worried that this would lead to inflation, which would cause dissatisfaction among Germans who are accustomed to low inflation, and cause political and social problems. As a result, Germany, with an inflation rate of only 3.5%, not only rejected the request of the last G7 summit to cut interest rates, but raised the discount rate to 8.75% in July 1992. In this way, the high German interest rate caused a wave of selling pounds and lira in the foreign exchange market and rushing to buy marks, causing the exchange rate of the lira and the pound to plummet, which was the direct cause of the European currency crisis in 1992.
The first to respond to the increase in Germany’s rate yesterday was Finland in northern Europe. The Finnish mark is automatically linked to the German mark. After Germany raised interest rates, Finns exchanged the Finnish mark for the German mark. The exchange rate between the Finnish mark and the German mark continued to fall by September. In order to maintain the price comparison, the Bank of Finland had to sell the Deutsche mark to buy the Finnish mark, but the Finnish mark still did not leak. The Deutsche mark of the Bank of Finland was limited. On September 8, the Finnish government suddenly announced that the Finnish mark and the German mark were delinked and floated freely.
At that time, the British and French governments suggested to the German government to lower interest rates because of the seriousness of the problem. However, Germany believed that the decoupling of the Finnish Mark was insignificant and rejected the British and French governments’ proposal. German central bank President Schlesinger publicly announced on September 11 that Germany Interest rates will never be lowered. When speculators in the currency market got the news, they recklessly turned to the firming Deutsche mark. On September 12, the Italian lira, which has always been a soft currency in the European monetary system, was in an emergency. Under such circumstances, although the Italian government raised the bank’s discount rate twice on the 7th and 9th, from 12% to 15%, and sold marks and francs to the foreign exchange market, it failed to ease the situation. . On September 13, the Italian government had to announce the devaluation of the lira, reducing its price by 3.5%, while the other 10 currencies of the European monetary system will appreciate by 3.5%, which is the first in the European monetary system since January 12, 1987. adjustment.
Only at this time did the German government make slight concessions to maintain the operation of the European monetary system. On September 14, the German government officially announced that the discount rate was reduced by half a percentage point from 8.75% to 8.25%, which was the first time in five years for Germany. A rate cut. This move by Germany was highly appreciated by the United States, Britain and France, but it was too late, and a bigger storm was blowing in the foreign exchange market in the United Kingdom. Just the day after Germany announced the interest rate cut, the exchange rate of the pound fell all the way, and the parity between the pound and the mark broke through the three lines of defense and reached 1 pound equal to 2.78 marks. The collapse of the pound threw the British government into disarray. It announced an increase of 2 percentage points in the bank interest rate in the early morning of the 16th, and a few hours later, it announced an increase of 3 percentage points, raising the interest rate from 10% to 15%. Raising interest rates twice a day is unprecedented in recent British history. The purpose of this abnormal move by the UK is to attract short-term capital inflows from abroad and increase the demand for sterling to stabilize the exchange rate of the pound. However, changes in the market are subtle. Once confidence is shaken and the general trend is established, the trend of exchange rate changes will be difficult to contain.
Sterling plummeted and announced to withdraw from the European monetary system
From September 15 to 16, 1992, central banks injected tens of billions of pounds to support the pound, but to no avail. On the 16th, the price of sterling and marks fell from 1 pound equal to 2.78 marks the previous day to 1 pound equal to 2.64 marks, and the parity of pound to US dollar also fell to the lowest level of 1 pound equal to 1.738 US dollars. After all the organs were exhausted, on the evening of September 16, British Chancellor of the Exchequer Lamont announced that the United Kingdom would withdraw from the European monetary system and reduce the interest rate by 3 percentage points. On the morning of the 17th, the interest rate was reduced by 2 percentage points and returned to the original 10% level. .
After the devaluation of the Italian lira on the 13th, it was in crisis again in the foreign exchange market after only 3 days. The price of the mark against the lira once again exceeded the limit of the readjusted exchange rate. The Italian government spent 40 in order to save the lira from falling. The trillions of lira’s foreign exchange reserves did not work, and the lira had to be announced to withdraw from the European monetary system and let it float freely.
After a six-hour emergency meeting of European Community finance officials, they announced that they agreed to temporarily withdraw from the European monetary system, and Spain’s match tower was devalued by 5%. From January 1987 to September 1992, the exchange rate of the European monetary system was adjusted only once in more than five years, and from September 13 to 16, 1992, it was adjusted twice within three days. This shows the seriousness of the European currency crisis.
It was not until September 20, 1992, that the French referendum passed the central idea of ​​establishing a political entity similar to the United Only by pursuing a common foreign and security policy of the “Mastekh Treaty” can the European currency storm be temporarily subsided, and the pound and the lira tend to be in a balanced state after devaluation.
Lessons from the European Currency Crisis There are many profound lessons from
this currency crisis. There are also important lessons for ensuring the stability of Hong Kong’s financial market, which is to strengthen the coordination and cooperation of international monetary and financial policies. The financial turmoil in Western Europe in September largely reflects the incoordination of monetary and financial policies in the major industrial countries of the European Community. At that time, despite its growing economic strength and strong Mark, Germany was paranoid about its own interests, regardless of the sluggish economies of Britain and Italy, and not only rejected the seven-nation summit meeting for their own economic development to lower interest rates. Calls for it to cut rates have instead raised them. Under the circumstance that the Finnish mark was forced to decouple from the German mark, it did not realize the urgency of maintaining the operating mechanism of the European monetary system, and even publicly announced that it would never reduce the interest rate. Waiting for the turmoil in the foreign exchange market to start announcing a half-point cut in its discount rate can only give speculators in the foreign exchange market the expectation that Germany has raised interest rates in the past to curb inflation and is now lowering interest rates. Just a concession to inflation. Of course, the fault of this crisis cannot be entirely blamed on Germany. However, it needs to be emphasized that in today’s economic integration and globalization, despite the increasing economic contradictions between countries, no country can go its own way. Only in cooperation and coordination can we achieve stable development. The world is moving in the direction of international cooperation and policy coordination, and this trend has now become an irreversible trend. The so-called policy coordination is to make common adjustments to certain macroeconomic policies and to jointly intervene in mutual economic relations and economic activities, so as to achieve the purpose of mutual assistance and mutual benefit. This is mainly due to the spill-over effect of the economic policies of various countries, that is, the policies adopted by one country often affect the economic operation of other countries. As a result, the coordinated economic policies adopted by all countries will promote the development of the world economy, and go their own way, which often leads to unfavorable consequences.