Maastricht is, after all, a route march to monetary union. It sets out a game-plan and a timetable for a single currency. Europe's currencies are meant to become more and more fixed against each other until they become locked together in 1997 or 1999. This long transition always looked difficult, but the autumn currency crises now render it absurd.
The problem arises from the conflict between a fixed exchange rate system and the free flow of international capital, a subject of repeated warnings for several years. Take, for example, Richard Portes's remarks to a CBI conference in October 1989: 'Stage one, progressing to universal European Monetary System membership with full capital mobility, is due to begin in July 1990. It cannot be maintained for long. The system will either break up or will have to move quickly to irrevocably fixed rates, with all they require to maintain them.'
Until the Danish rejected Maastricht in June, the markets believed that the EMS was a glide path to monetary union. With the Italian realignment, the doubts grew. With sterling's ejection from the system, they became a tide. And with France's petit oui, scepticism became conventional wisdom.
The genie of currency turbulence cannot easily be put back into his bottle. Most EC countries want to continue to restrict the movements of their currencies, because they do so much trade with each other. Most also want a single currency. But they need to think of new ways of doing both. Patching up the present EMS is asking for trouble.
Looking back on the last few years, the real surprise is that the EMS was so stable despite the impact of German reunification. After all, German interest rates had been forced to a post-war high by the fiscal supercharging of the German economy. Because investors prefer to hold marks instead of other currencies linked to it, those currencies have to offer an interest rate premium over mark interest rates.
With the German mark as the EMS's so-called 'anchor currency', German reunification drove up interest rates to record levels across the Continent. Those countries with high levels of debt in either the private or public sector - Britain and Italy - became less credible participants in the EMS. The markets picked them off.
Why not merely reinstate the old EMS with new parities? The main reason is that the situation has not settled down, as Friday's attack on the franc shows. The German mark is still not a suitable anchor currency for the system, because the shocks of reunification have not subsided.
No one can predict exactly what course the German economy will take, but either of the two common scenarios will be uncomfortable for countries which decide to link their currencies closely with the mark. If the German economy plunges into a steep recession next year, and if the Bonn government raises taxes to control a budget deficit now heading for 6 per cent of national income, it is not difficult to imagine that German interest rates could tumble.
In the short run, other countries will breathe a sigh of relief. Lower German rates will allow lower interest rates in France, the Benelux and Iberia, a monetary easing which should outweigh the loss of exports to the recession-hit German market. But by 1994, German rates could actually be too low for the comfort of other EMS participants.
Alternatively, the effects of fiscal supercharging may mean that the German economy proves to be surprisingly resilient. If wages do not slow down, the Bundesbank may prove slow in cutting interest rates, so that other European countries locked into the EMS face a long period when their own interest rates are still too high for the needs of their own depressed economies.
The central problem of the EMS - that its anchor currency has become unreliable - could thus only too easily continue. The Maastricht route march to a single currency would continue to be difficult, even for core currencies such as the guilder, which have so far weathered the autumn's speculative storms.
There are several solutions to this problem, but only two which seem politically plausible. One solution involves a more rapid move to even more fixed exchange rates and a common monetary policy. The other solution involves a move towards more flexible exchange rates. But the EMS cannot stand still.
A more rapid move to de facto monetary union between Germany, France and the Benelux would eliminate speculative attacks on the core currencies. In effect, the two-speed Europe which the Maastricht treaty envisages for 1999 (if some countries fail to meet the conditions, such as low inflation) could happen now.
There are two political hurdles. The first is the weaker currency countries such as Italy and Britain, which have traditionally opposed any such relegation. But they are hardly in a position to argue, and there are advantages to them in having a new francomark as the EMS anchor currency. Its interest rates would now be lower, because they would reflect French and Benelux recession as well as German inflation.
The second hurdle is Germany itself. Although it would no doubt accept the core group as having earned its spurs in the anti-inflationary tests of the last few years, it would have to change the Bundesbankgesetz which determines the central bank's operation if it were to share control over monetary policy with the Banque de France. In principle, though, such a francomark could exist within the framework of Maastricht.
The other solution to the problem of Germany's unreliability as an anchor is to make the system more flexible. This has traditionally fallen foul of France's determination not to abandon the policy of the franc fort, but John Williamson has come up with an elegant solution which just might be politically saleable.*
He proposes that the fluctuation bands for the mark should be widened from 2.25 per cent to 6 per cent or even 10 per cent. This would allow the French to argue that there had been no change in parity, but would allow the mark to rise, bringing downwards pressure on German inflation and thus allowing the Bundesbank to cut interest rates.
The wider band for the mark should also in principle allow other countries to enjoy lower interest rates. If the mark was at the top of its wider band, the markets could expect it to fall once the impact of reunification fades. This would allow Germany to have higher interest rates than linked countries, because the total return (interest and expected movement in currency) would still be equal. A 10 per cent margin could allow an expected German interest rate two percentage points higher than franc rates for five years, or 4 per cent higher for 2 1/2 years.
The fashionable solution to the EMS - a move to narrower fluctuation bands - would make things worse. It is time to stop half-baking the EMS, which needs to become either more fixed or more flexible.
* 'Economic Insights', Institute for International Economics, Washington.