But the effects on economic growth are expected to be relatively small and slow to feed through. Most economists expect growth across Europe as a whole to be boosted by only half a percentage point or so next year.
The boost to growth will come in part from greater flexibility to cut interest rates now that ERM members do not have to pay a premium over German rates to defend their currencies' parities. Any fall in ERM currencies will also help growth by boosting exports and discouraging imports.
Interest rates are expected to fall by between two and three percentage points by the end of the year in most ERM countries, with German rates falling less dramatically. This would take the French intervention rate down from 6.75 to about 4 per cent. Some dealers were disappointed that rates had not been cut yesterday.
'This tough talk on cutting rates is bizarre. The only useful thing the ERM members can salvage from this mess is lower rates', said Kit Juckes, of Warburg Securities. But he forecast that the cuts would soon come and that as a result the European economy would grow by 1 per cent next year, up from his previous forecast of 0.5 per cent. He expected growth in 1995 to be around 2 per cent, up from a previous 1 per cent.
The impact of lower interest rates on growth is less dramatic in most European countries than in Britain because Britain has more mortgage holders and more companies who borrow at short-term rates.
Alison Cottrell, of Midland Global Markets, said France could now see its economy expand slighly next year, having forecast before the crisis that it would be flat. She added that growth in Germany next year would be about a quarter of a percentage point higher next year at best.
A boost of between a quarter and half a percentage point to growth in most European countries in 1994 was forecast by Mark Cliffe, of Nomura Research. He added that this would not be large enough to have much impact on Britain's recovery. Exporters might well find orders falling in the short term as the confidence of foreign customers fell temporarily in the aftermath of the turmoil.
Paul Chertkow, of UBS, was more optimistic, arguing that ERM members would get 'a bang for their buck'. He believes European growth could be boosted by up to 1 per cent next year. Gerard Lyons, of DKB International, took a similar line. 'The economic impetus will be underestimated and the inflationary impact overestimated,' he said.
Weak currencies in the ERM yesterday fell by between 2 and 7 per cent, using up a little of the room for manoeuvre provided by the widening in their permitted bands of variation to 15 per cent.
But economists expect cuts in interest rates to herald a further fall in the exchange rates of most weak ERM currencies against the German mark. Forecasts for the French franc in a month's time varied from Fr3.65 to Fr3.44 per mark. The Portuguese escudo, Spanish peseta and French franc are expected to devalue by around 7, 5 and 3.5 per cent respectively in the next three months.
The devaluations are expected to be much smaller than the 13 per cent suffered by the pound at its lowest, in part because British experience suggests that inflation will be subdued.
The impact on growth of falls in most European currencies will be offset in part because the mark will probably rise against other ERM currencies, hitting German competitiveness.
The boost to growth from devaluation and lower interest rates may also be offset if countries use them to compensate for a tightening in fiscal policy - cutting government borrowing by either raising taxes or reducing public spending. The French and Danish governments are currently expected to borrow an excessive 5 and 7 per cent of their gross domestic product respectively this year.
The cracking of the ERM will no doubt be welcomed in many European economies as a way to boost growth and cut record unemployment. But the gains are likely to be neither quick nor spectacular.Reuse content