Erm, R I P - European Exchange Rate Mechanism - Editorial

The decision to let European currencies float in a 15 per cent band signals the effective end of the European Exchange Rate Mechanism. Good riddance. The economies of France and other countries have suffered enough for the honor of having their currencies tied to the Mark. The Bank of France tried gamely to support the franc, but eventually too many speculators concluded that, even in France, sanity must prevail.

A system of fixed exchange rates can bring some temporary benefits in the periods when economies are in sync and nations are willing to coordinate their economic policies. But it's hard, indeed impossible, to keep a pegged-rate system intact when governments follow divergent economic policies, or when their inflation rates differ, or when the economic fundamentals change in some way. Since 1990 Germany has been obsessed with the inflationary consequences of its reunification. Britain and France, meanwhile, have needed a looser monetary policy to stimulate recovery. With exchange-rate changes ruled out by ERM, the burden of adjustment fell entirely on the domestic economy: France, Britain, Italy, Spain, and other countries have endured severe recessions to keep their currencies aligned with the Mark. Britain, having bailed out of ERM last year, is now getting economic growth. France is likely to follow.

There is a great irony. here. Supporters of the Maastricht Treaty dream of a day when all Europe will use a single currency managed by a European central bank. But as Milton Friedman pointed out in these pages three years ago when enthusiasm for the ERM was at its most detached from reality: "In Europe, the obvious choice for a single central bank would be the Bundesbank . . . that would require eliminating the Bank of England, the Bank of France, the Bank of Italy, and so on, or converting them into administrative branches of the Bundesbank. A possible alternative is the Bank of International Settlements, which would require eliminating the Bundesbank as well. It is hard to regard either of these possibilities as a serious option. The hope that a system of national central banks linked by pegged and managed exchange rates can prove a waystation to a truly unified currency seems to me an utter mirage."

Elites love these bogus utopias. Politicians who value their national identities - and their jobs - should beware.

COPYRIGHT 1993 National Review, Inc.
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