The cause of this unravelling has been the high level of German interest rates. The Bundesbank started raising rates in 1988 and has kept them high to choke off the inflationary effect of reunification. The key Lombard interest rate was finally cut by a quarter point to 9.5 per cent when the ERM crisis broke last September, but has not been reduced since.
Other European countries have been forced by ERM membership to match these rates, in order to maintain the value of their currencies relative to the German mark. But these countries do not face the same inflationary dangers from reunification. Indeed, rising unemployment and slowing economic growth mean there is an overwhelming case in most member countries for rates to fall.
The predicament has been made more painful still by one of the ERM's successes - lower inflation. This has meant that real interest rates, which take account of price changes, are even higher, giving a further turn to the screw.
The currency markets recognise that most democracies cannot sustain the consequences of these rates, often including a jobless rate of more than one in 10 and rising. Speculation has forced five ERM members to throw in the towel. A look around Europe shows that the pressure persists.
High interest rates have proven far from painless in Germany itself. German industrial output has been shrinking since last spring and economists are increasingly predicting that 1993 will see a full- blown recession after 1 per cent growth last year.
But the Bundesbank has remained reluctant to cut interest rates. It is waiting for evidence that wage settlements will not be inflationary and that the government is making progress in cutting the amount it borrows by cutting spending or raising taxes. Inflation remains above the Bundesbank's target at nearly 4.5 per cent.
France is the linchpin of what remains of the ERM, having pursued a franc fort policy since devaluing in 1987. Unemployment is around 10.5 per cent, having risen for two-and-a-half years. Growth has been below its trend rate since 1991 and Goldman Sachs forecasts that 1993 may see output fall. Imports and exports are both dropping and business surveys point to falling demand for factory goods.
The German slowdown threatens a further weakening in French exports. This has been exacerbated by the loss of competitiveness to those countries that have devalued or left the ERM, which account for 30 per cent of the French export market. Real short- term interest rates are near an all- time high, ending 1992 at more than 10 per cent, twice the level in Germany and 25 times that in the US. A small further rise would probably trigger mortgage increases.
French experience has uncomfortable parallels with that of Ireland. Unemployment is nearly 17 per cent, while inflation is barely above 2 per cent. Government borrowing is among the lowest in Europe at 2 per cent of GDP.
The Irish economy grew around 2 per cent last year, while running a current account surplus. Ireland was forced to devalue largely because of its loss of competitiveness relative to Britain, the market for a third of its exports. The high interest rates needed to defend the punt threatened a 3-5 per cent jump in bank and mortgage rates.
Denmark looks like the model ERM member. Inflation has more than halved since 1988 and is now around 2 per cent, the trade account is comfortably in surplus and government borrowing is little more than 2 per cent of national output. But the economy weakened late last year, with consumer confidence falling sharply.
Growth was just over 1 per cent last year. Consumer spending has been hit by rising unemployment, now above 11 per cent. Defending the krone has meant interest rates above 15 per cent, with little of the pain eroded by inflation.
Belgium is firmly part of the mark-bloc. Its interest rates are in line with German ones, with the result that growth slowed sharply in 1991 and was probably around 1.3 per cent last year. Unemployment is edging towards 9 per cent, but this does not appear to have undermined support for the country's role in the ERM. Inflation is expected to be steady at around 2.5 per cent this year, with wage indexation tying in the benefits.
The Netherlands is perhaps most closely linked to Germany's fortunes. Factory output has fallen sharply since last summer. Unemployment has also risen, but is still below 5 per cent. Falls in business and consumer confidence point to further weakness, while order books are at their lowest levels for a decade. Cuts in public spending will not help.
After growing by nearly 2 per cent last year, Italy may be in recession in 1993 for the first time in 18 years. Weakness is spreading from the capital goods sector as sharp falls in employment deal a severe blow to consumer confidence.
Inflation was above 6 per cent between 1989 and 1991, but could average less than 5 per cent this year. Real interest rates were 8.8 per cent at the end of last year. Efforts to cut government borrowing have not given the lira sufficient stability to rejoin the ERM.
Paul Temperton, of Merrill Lynch, says high unemployment in Spain - about 16 per cent last year - owes more to the labour market than European slowdown. Growth was around 1.7 per cent, but has now been almost halted by high interest rates, a tight budget and lower export growth.
Spain demonstrates that devaluation within the ERM is not necessarily a route to lower interest rates. Rates are now around 14 per cent, compared with 12 per cent before the crisis. The apparent relief of a devaluation can be unwound by the fear that there is another to follow, making it more difficult to defend the new rate.
Portugal was forced to devalue by its close relationship with Spain. The authorities have accepted high real interest rates to bear down on inflation, around 9 per cent last year. The economy grew by about 2.4 per cent last year, little changed from 1991. Unemployment is only about 5 per cent, but will probably rise.
Unlike Spain and Portugal, Britain has managed to cut interest rates dramatically after devaluing. This has been achieved by suspending ERM membership and not targeting an exchange rate against the mark. To the extent that the Government keeps interest rates low, real interest rates may fall further if inflationary pressure picks up as the economy recovers.
Greece hopes to join the ERM - should one remain - at the end of this year. It has supported the drachma with high interest rates and capital controls, but has been put under pressure by devaluations in Spain and Italy, two key trading partners. The economy grew by about 1.7 per cent last year. Inflation was over 15 per cent with interest rates well above that.
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