Sir: Considering Gavin Davies' thoughtful analysis of problems likely to face the UK outside the single European currency (22 January), it is rather surprising that no mention has been made so far about the experience gained under the Bretton Woods system, which combined stability of exchange rates with some flexibility in their management.
Exchange rates were fixed in terms of US dollars, but were allowed to change whenever necessary to correct a "fundamental disequilibrium" in a country's balance of payments. This concept was never given a definite meaning, which perhaps was wise considering its complexity. Its interpretation was left to the managers of the IMF and the countries concerned, facing unacceptable reductions in income and employment. The system was not perfect, but it worked reasonably well for a quarter of a century after the Second World War. It came to an end only when President Nixon took the dollar off the gold standard in the early 1970s.
Today, external stability could be achieved fixing exchange rates between the "hard" Euro and currencies of the soft core countries on a semi-permanent basis. This would reduce the danger of beggar-my-neighbour devaluations by the latter countries, which is of such concern to German authorities. Similar to Bretton Woods, exchange rates could still be subject to occasional negotiated adjustments, mutually agreed between the inner and outer cores of EMU in situations approximating "fundamental disequilibrium".