City: Who's afraid of floating exchange rates?
Sunday 25 July 1993
For the French, the agony of pulling out of the ERM (and thus virtually killing it) would be even greater than for Britain last year. They have 10 years of history invested in it as well as a large chunk of present government policy. They are inclined to believe the pressure on the franc is a dastardly Anglo-Saxon conspiracy - which is nonsense.
Indeed, oddly enough, there appears to be even less of a conspiracy in the currency markets now than there was against sterling last September. This time, the attack on the franc is a broadly based free-for-all - no really big individual players have yet emerged on the scale of George Soros's dealings in sterling last year. And the Bundesbank has been trying to hold the line in a way it did not with the pound. Even if the franc wins a temporary reprieve, the markets are not likely to leave it alone for long.
For France, ERM withdrawal would mean a - probably short - period of deep national angst and economic uncertainty until, as in Britain, the benefits of lower interest rates showed through in recovery.
For British industry, the prospect of floating European exchange rates probably holds few terrors. At the moment, exporters are getting a handsome benefit from having the pound outside a system that overvalues the currencies of direct competitors like Germany and France. Despite recession on the Continent, UK exporters seem to be making headway in those markets. But they would not be too unhappy to see the French economy, at least, starting to recover with the help of a lower franc. They may lose the price advantage but higher demand should compensate.
And for the City it hardly matters whether the ERM exists or not. That's the beauty of being a dealer. Floating rates or fixed rates - they're simply different kinds of market conditions to get used to. From the point of view of your average foreign exchange trader, the ERM had its advantages: at best, it periodically threw up the kind of one-way bet that netted Soros his pounds 1bn profit last year. Free-floating currencies, on the other hand, tend to be more volatile more of the time, and volatility is where dealers make most of their profits. For currency traders it's unquestionably a case of 'heads we win, tails we win too'.
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