This goal has been largely realised with the creation of a single EC market. To move to a single currency - monetary union - is a logical and probably indispensable reinforcement of any such entity. But first the economies of member states must converge, and broad fluctations in the value of currencies need to be controlled. The resulting more stable environment should encourage outside investment and prevent competitive devaluations. Such were the laudable intentions behind the ERM's establishment. All other EC currencies were to be pegged to the German mark, which had long been Europe's strongest and most inflation-proof currency. A single currency would only be introduced when the Germans were convinced it would be at least as strong as the mark.
But even a currency that had become the symbol of a nation's monetary rectitude is susceptible to the impact of historical events. Sterling lost its global role under the pressure of repaying the debts incurred by the First World War. The dollar was similarly dethroned by attempts to pay for the Vietnam war and President Lyndon Johnson's social reforms without adequate tax increases.
In Germany, it was the political miracle of unification that did the damage. In this instance, the mark did not sink, a remarkable reflection of faith in the Bundesbank. But the huge cost of rebuilding the new Lander created strong inflationary pressures. To counter these, the Bundesbank was obliged to put up interest rates. To compete, other member states had to raise theirs correspondingly, even if economic conditions required precisely the opposite. From having been an encouraging symbol of progress towards the creation of a stable European economic environment, the ERM became a kind of doomsday machine, generating only hostility to the goal of economic and monetary union embodied in the Maastricht treaty. It seriously undermined support for Europe by accentuating the deepening economic recession, first in this country and then on
The markets, having tested the ERM's defence systems and found them wanting, began a fierce assault on the more vulnerable members. Last September the pound and lira were driven out, and the peseta and escudo forced into the first of two devaluations. The markets then turned their fire on the French franc and the Danish kroner. Yesterday they succeeded in driving the franc below its support level; not even the fiercest political will to keep it abreast of the mark had proved able to buck the markets. The ERM in its more rigid latter-day form is finished.
What now? To scrap the mechanism altogether would be a grave blow to confidence in the EC's future. It would also, for reasons outlined above, be likely to jeopardise the single market. The best hope seems to lie in a period in which it operates in a far more flexible form. As at present constituted, participating currencies (the peseta and escudo apart) are supposed not to rise or fall against the mark by more than 2.25 per cent. If that margin were increased to 6, perhaps even 10 per cent, with periodic realignments not excluded, currencies could more closely reflect the realities of different national economies. After a period in which the Germans sorted out some of their difficulties, member states could hammer out a new strategy for economic convergence and monetary union.
For a Prime Minister who has been further weakened by yesterday's loss of one of the country's safest Conservative seats, the ERM's agonies offer some immediate comfort. The Government's belief that the mechanism was fundamentally flawed has been vindicated, and sterling's humiliating ejection can be reinterpreted as a timely exit. At the same time, a large hole has been knocked in the treaty that the Government has at last pushed through the Commons. But let the Euro-sceptics not rejoice. Like everyone else, they want Britain to enjoy all the benefits of a single market. They should have no illusions about the difficulty of sustaining that privilege in a Europe of wildly fluctuating exchange rates.Reuse content