Saturday's devaluation of 10 per cent, the largest in the ERM's history, was thus about as surprising as death at the end of a Greek tragedy. Thanks to the foreign exchange dealers' continuing success in exploiting the gap between pretensions and known weaknesses, the ERM is close to losing its last shreds of credibility.
There was never anything fundamentally wrong with its central concept: that pegging weaker currencies increasingly closely to a central or anchor currency would create a zone of stability that would benefit all those within it. This came to be seen as a precursor of monetary union, for which a target date of 1999 was set. What was never foreseen was that the anchor currency, the mark, would itself come under severe threat from inflationary pressures springing from the huge cost of German unification. The high interest rates consequently imposed by the Bundesbank, which the ERM's other members are obliged to match, have seriously aggravated the recession within the European Community. The resultant strains were increased by the very low interest rates introduced in the US to counteract the effects of severe debt overhang.
In one EC member state after another, the deflation forced on the ERM's members by policies designed for purely German consumption have proved politically unacceptable and economically traumatic. First, the Italian lira and sterling left. Then the Spanish peseta and Portuguese escudo were devalued. Now only the French franc, Danish krona and Benelux currencies (the latter effectively form part of a mark zone) are clinging on, despite heavy and frequent assaults on their fingertips.
Countries still in the ERM now have the worst of all possible worlds, with an appalling deflationary squeeze accepted by their governments for largely political reasons. In France, where an election impends in mid- March, high interest rates are aggravating high unemployment. Logic demands they should be cut, which would be incompatible with maintaining the strong franc to which all three main political parties are committed. Logic must surely prevail in this most logical of nations, even if only after the elections.
Which currency will be this week's target will soon become evident. If the ERM is not to be utterly discredited, action to reform it cannot be delayed much longer. The most obvious alternatives are for it to revert to its more flexible form in which exchange rate adjustments, generally quite small, were relatively frequent; or forwards, by accelerating the timetable for monetary union laid down in the Maastricht treaty. That is probably what the French and Benelux countries would prefer, although last week Helmut Schlesinger, President of the Bundesbank, advised against such a move. In this context, Mr Schlesinger is Godot. Waiting for him and his council to make some minimal reduction in German interest rates is no longer an adequate substitute for substantive reform.