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276 Unemployment and Monetary Policy in the European Union
be prepared to see their exchange rates fall below their lower limits, and hence
face ejection from the ERM.
Ideally it might be hoped that France would take the initiative by slashing interest
rates and letting the franc float. Other European countries, including Belgium
and Spain, would follow. At this point two possible scenarios are conceivable:
the first is that, faced with the prospect of a sharp loss in competitiveness,
Germany would limit the damage by cutting interest rates. Within just a few
weeks the longawaited cut in European interest rates would have materialised.
Second, the Bundesbank would refuse to cut rates beyond another token
amount, and then Germany would be left alone in the ERM (thereby floating too).
This would mean the end of the EMS as presently constituted. But this should
not be a cause for regret.
To be sure, there was a time when the ERM, with fixed parities and Bundesbank
leadership, performed a very useful function. But in their quest for moderate
inflation, countries adopted an unwavering D-Mark peg, which is now
becoming a problem.
There is no reason to equate yielding on existing ERM parities with sacrificing
the entire anti-inflationary effort of the 1980s. France has no inflation
problem—unlike Germany. France can, therefore, afford to do without the recession
which the Bundesbank feels it must impose on Germany. Spain has a phenomenal
unemployment problem which should be the immediate focus of
attention, not a currency peg that is killing growth and prosperity.
Some might bemoan the ensuing incapacitation of the EMS as a rude shock to
the dream of European unity. But such a concern is unwarranted.
First, the central element of the European Community is the set of common
market institutions, and these should and would remain in place even if the EMS
were temporarily impaired. Second, plans for European monetary union are
already in tatters. Thus, leaving the present system would only acknowledge a
truth that many in Europe refuse to face. Forsaking the present arrangements is
the only way to move quickly towards a new European monetary system in which
a crisis such as the current one cannot be repeated.