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9
WHY THE EMS DESERVES AN EARLY BURIAL
Olivier Blanchard, Rudiger Dornbusch, Stanley Fischer, Franco
Modigliani, Paul Samuelson, and Robert Solow
The current turmoil in the currency markets and the broader crisis of rising unemployment
in Europe is the most striking evidence yet that European monetary
policies and exchange rate arrangements are profoundly counerproductive.
By far the most important factor esponsible for this debacle is the Bundesbank’s
policy of high interest rates, combined with certain features of the
European Monetary system which have forced other member countries to follow
suit: these include the mobility of capital across member countries and the fact
that central banks have interpreted the rules of the exchange rate mechanism to
require not only the maintenance of fixed exchange rates but also the avoidance
of party adjustments.
The result of high interest rates across Europe has been that unemployment
has risen to record levels. Governments have done little but seek a variety of
excuses for the loss of jobs. It looks as if the 1930s are being re-enacted. Then,
it was felt to be imperative to hang on to gold at any price: today the feeling is
to hang on to the D-Mark.
It is not useful to spend too much time allocating blame—on a Bundesbank
that fights inflation of “only” 4 percent, on EMS member countries such as
France, which opts for a hard currency at the price of an entirely unwarranted
recession, or on a country like Spain, which believes that being in Europe means
being a member of the ERM.
In our view, the essential issue is for the EMS countries to shift priorities,
putting unemployment at the top of the list and recognising that much labour can
be reabsorbed through reflationary policies, beginning with a sharp cut in interest
rates.
Of course, countries would have to accept the depressing implications that such
a move would have on their exchange rate with the D-Mark, without committing
their reserves in an attempt to support the current parity. This means they must
Reprinted with permission from Financial Times, July 29, 1993.