European Currency snake

Genesis of the Snake

The genesis of the EMS begins in fact in 1944 with the Accords of Bretton Woods where several tens of States decide that, the finished war, the new worldwide economy will be done thanks to the assistance of the the United States and the exchanges will thus be based on the American dollar. This specificity of the American dollar consequently will confer a supranational value to him and will give an exceptional privilege to the the United States while enabling him to pay all its imports in its national currency, whereas the rest of the world is tiny room to gain the currencies necessary to the payment of its purchases. To obtain the invaluable dollars, the countries have of another choice to only export, in particular the countries of the Western Europe and the Japan, whereas the United States pushed by the facility to finance their purchases by creating dollars takes the practice of surconsommer imported products, in any case, always more than should not allow them their real situation making the system increasingly fragile.

Whereas they had been committed ensuring the convertibility of the gold dollar 35 dollar the ounce, the the United States give up unilaterally in 1971 this convertibility. Consequently, the exchange value of the dollar will evolve/move freely compared to the other currencies giving course to a new system of floating parities from which the European Monetary System is resulting. During the Years 1970, the holders of dollars sell them to buy gold and other currencies, making assemble the rate of gold and fall the dollar.

The most required currencies are those whose countries knew to direct their productive apparatus towards export, in particular the West Germany and the Japan, which confers a flourishing economic health and an active trade balance to them. Paradoxically, the rise of their currency make them lose economic Compétitivité and their exports are made more difficult, threatening of the whole pieces of their economies, on which depend 20 to 30% their employees. This pressure obliges them to carry out even more efforts of productivity and to make assemble in range their products towards even more quality, to allure the most fortunate purchasers and most demanding.

However this policy has its own limits. For example, for the West Germany, the principal countries customers are likely to become inaccessible because their currencies go up less quickly compared to the dollar, and thus drop relatively compared to the Deutsche Mark. In 1972, the European Currency snake is created. It is the recognition which there has existed for fifteen years in Western Europe a true community of economic interests and which these countries are, ones for the others, as many important customers of important suppliers.

These countries realize that they do not want to take any more the risk to leave their commercial exchanges to the thank you of a speculative movement which would take one of them for target. By the signed pact, the countries are committed floating in concert while maintaining between their currencies of the quasi stable reports/ratios (about 2,5% of maximum oscillation). The message with the speculators is from now on clear: those which would like to make assemble the Deutsche Mark will have to also make assemble the other currencies which are attached to him within the framework of the European Currency snake.

History of the Snake

However, the fall of the American dollar continued and of 1972 with 1978, the currencies cracked the ones after the others. The Franc French left the Snake twice, in 1974 and in March 1976, because even if he appreciated himself compared to the dollar of 5,50 with less than 4,00, the drift was even more important compared to the German currency. In 1976, the pound sterling is obliged itself with a devaluation of 30%.

The economic problems during period 1977-1978 are important: generalized inflation, crisis of steel, collapse of the dollar, which of March 1977 at March 1978 loses 12,34% compared to the German currency, passing from 2,35 DM with 2,09 DM whereas the American trade balance records a deficit of 31 billion dollars for 1977. The US government does not support its currency and beginning 1978, monetary instability is generalized and the situation is such as same the Community exchanges are threatened. The European currencies the ones after the others must leave the European Currency snake.

the French franc again plunges at the time the legislative countryside of March 1978.
the Lire Italian knows more and more sudden starts with the participation of the Communists in the government coalition.
the Pound sterling, in spite of the devaluation of 30% in 1976, is always very weak.

The need for a new system is essential, around a monetary system able to prevent the take-off of the Deutsche Mark by ballasting it with the less powerful currencies of its principal business partners. October 27th, 1977, the British Roy Jenkins, then President of the European commission, proposes in its speech of Florence, to strike a great blow by creating a single currency for the nine countries and a Community budget which he proposes to fix at 10% of each GDP, because he estimates that no progress can be carried out by a policy of small steps.

The new formula, development after hard negotiations, between in force on March 13rd, 1979, it is the European Monetary System.

Benefitting from the experience gained in the management of the Snake, the two more important engineering changes are:

the currencies of the new system will take as reference a basket the average called ECU and made up to the economic proportion of the currencies adhering to the new system.
the fluctuation of the currencies by report/ratio the ones with the others, being revealed unrealistic, the new fluctuation of 1,125% is done compared to the basket. Each currency is given for ambition to float compared to the average of the others.

See too

History of the economic and monetary Union European

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