In my piece "The Battle for the Deutschemark
: Is Germany's secret internal war over EMU about to become public?" (January/February 1996), I talked about how Chancellor Kohl was selling the Maastricht Treaty and EMU as "the difference between war and peace in Europe during the twenty-first century," and how German Finance Minister Theo Waigel used his proposals for an "Economic Stability Pact for Europe--stricter permanent fiscal rules for the countries taking part in EMU" to over come public opposition to the new single European currency.
Finally, it is useful to note the extent to which all the major actors in Germany would be willing to sacrifice the deutschemark
to a truly democratic European Union.
stronger than) its central rate vis-d-vis the Deutschemark
by an unusually wide margin ([ILLUSTRATION FOR FIGURE 7 OMITTED], panel A); at the same time, both short-term market rates and policy-determined interest rates were significantly lower in the Netherlands than in Germany ([ILLUSTRATION FOR FIGURE 7 OMITTED], panel B).
The dollar has fallen to less than one-third of its 1970 value against the yen and is worth only 40 percent of its value against the deutschemark
. It is no longer a reliable store of wealth.
On October 6, 1979, the Federal Reserve was compelled, by a flight from the dollar into gold, the deutschemark
and the Swiss franc, to carry out the "Saturday night massacre." Federal Reserve Chairman Volcker announced that henceforth monetary policy would be directed to controlling the growth in the money supply and that short-term interest rates would be allowed to find their own level.
For simplicity, we will assume that EuroIndustries, like everyone else, prices its products in line with US dollar prices, but that it accepts payment in Deutschemarks
at the spot rate at the time of sale.
Given the severity of the recession, domestic wage moderation, stable or even falling world commodity prices and the appreciation of the Deutschemark
, progress towards price stability was disappointingly slow in 1993.
As a result, sterling was subject to strong downward pressure and the Deutschemark
to upward pressure - a situation which was aggravated by very large German budget deficits.
The picture that emerges from all this is that, whereas certain existing currencies are widely used in Europe, notably the Deutschemark
and, of course, the U.S.
In the last three months the deutschemark
has appreciated by 3 3/4 per cent, whilst the yen has declined by 5 3/4 per cent.
Until the last federal elections in Germany last year, the German people were never required to vote on the proposal to replace the deutschemark
with a European currency.
The soundness of Dutch economic policy -- characterised by a strong medium-term orientation centred around a close link between the guilder and the Deutschemark
and fiscal consolidation -- was underscored during the recent period of exchange rate turbulence, when the market never questioned the guilder-DM relationship and long-term interest differentials with Germany remained by far the narrowest of any EMS country.