The Making of the European Monetary Union: 30 years since the ERM crisis

30 EditedbyGiancarloCorsetti,GalinaHale,BeatriceWederdiMauro TheMakingoftheEuropeanMonetaryUnion:30yearssincetheERMcrisis TheMakingoftheEuropeanMonetaryUnion 30YearsSincetheERMCrisis WITHSUPPORTOFCEPRPARISFOUNDINGPARTNERS CEPRPRESS CentreforEconomicPolicyResearch33GreatSuttonStreet London,EC1V0DX,UK 187boulevardSaint-Germain 75007,Paris,France Tel:+44(0)2071838801 Email:cepr@cepr.orgWeb:www.cepr.org ISBN:978-1-912179-68-8 Copyright©CEPRPress,2023 TheMakingoftheEuropeanMonetaryUnion 30YearsSincetheERMCrisis EditedbyGiancarloCorsetti,GalinaHaleandBeatriceWederDiMauro CENTREFORECONOMICPOLICYRESEARCH(CEPR) TheCentreforEconomicPolicyResearch(CEPR)isanetworkofover1,700researcheconomistsbasedmostlyinEuropeanuniversities.TheCentre’sgoalistwofold:topromoteworld-classresearch,andtogetthepolicy-relevantresultsintothehandsofkeydecision-makers.CEPR’sguidingprincipleis‘Researchexcellencewithpolicyrelevance’.ItwasfoundedintheUKin1983,whereitisaCharity,andinNovember2019CEPRinitiatedthecreationofanAssociationunderFrenchlaw,inordertoprovideavehicleforanexpansioninFrance.ThemembersoftheConseild’AdministrationoftheAssociationareidenticaltotheUKBoardofTrustees. CEPRisindependentofallpublicandprivateinterestgroups.IttakesnoinstitutionalstandoneconomicpolicymattersanditscorefundingcomesfromitsInstitutionalMembers,projectsthatitrunsandsalesofpublications.Becauseitdrawsonsuchalargenetworkofresearchers,itsoutputreflectsabroadspectrumofindividualviewpointsaswellasperspectivesdrawnfromcivilsociety.CEPRresearchmayincludeviewsonpolicy,buttheTrustees/membersoftheConseild’AdministrationoftheAssociationdonotgivepriorreviewtoitspublications.TheopinionsexpressedinthisreportarethoseoftheauthorsandnotthoseofCEPR. ChairoftheBoardSirCharlieBeanFounderandHonoraryPresidentRichardPortes PresidentBeatriceWederdiMauro VicePresidentsMaristellaBotticiniPhilippeMartinUgoPanizza MarReguantHélèneRey ChiefExecutiveOfficerTessaOgden Contents Forewordvii ThetraumaoftheEuropeancurrencycrisesinthe1990sanditsconsequencesuntiltoday1 GiancarloCorsetti,GalinaHaleandBeatriceWederDiMauro Part1:FromBrettonWoodstotheERM 1ThirtyyearsaftertheERMcrisis13 BarryEichengreen 2WhyistheEuropeancurrencyandfinancialcrisisofthe1990srelevanttoday?17 GiancarloCorsetti 3AsmallcurrencyintheERMzoneofmonetaryinstability25 PatrickHonohan 4TheEuropeanMonetarySystemcrisisof199231 RichardPortes Part2:1992–GroundZero 5TheERMcrisisandtheUK:BlackorWhiteWednesday?39 SirCharlieBean 6TheERMcrisis:Ateachableepisodeforinternationalmacro43 CatherineMann 7ThebackdropoftheERMcrisis47 MauriceObstfeld 8ItalyandthecrisisoftheEuropeanMonetarySystem53 IgnazioVisco Part3:Adecadeofoptimism 9From1999(andbefore)to2007:Adecadeofoptimismoralostdecade?61 CharlesWyplosz 10Onegoodreasonwewereoptimistic:Theriseofinflationtargetingandthedemiseoffixedexchangeratecrises67 AndrewK.Rose Part4:Adecadeofcrisisintheeuroarea 11Theendofeuroareacrises?73 PaulDeGrauwe 12Adecadeofcrisisintheeuroarea:Howcanonereconcilepricestability withamonetarybackstopforgovernmentdebt?81 OlivierJeanne 13WhenEuropecatchesacold,therestoftheworldsneezes:Globalspillovers oftheeurocrises87 OzgeAkinciandPaoloPesenti 14ThirtyyearssincetheERMcrisis:Thebeginningoftheend95 LorenzoBiniSmaghi 15LessonsfromtheEuropeanMonetarySystemCrisisforEuropeanMonetaryUnion99 PhilipR.Lane Part5:Thenextdecade 16Thirtyyearson,newfrontiersforEurope’smonetarycooperation109 MartinSandbu 17Thearchitectureoftheeuro:Prospectsforthenextdecade113 JerominZettelmeyer 18FuturechallengestoEuropeansovereigndebtmarkets121 LeonardoD’Amico,FrancescoGiavazzi,VeronicaGuerrieriandGuidoLorenzoni Foreword September2022markedthethirtiethanniversaryoftheExchangeRateMechanism(ERM)crisis,aseismiceventwhichshookthecontinentandcausedasevererecessiontospreadrapidlyacrossEuropeaneconomies.Tomarktheoccasion,CEPRorganised,incollaborationwiththePierreWernerChairattheEUI,atwo-partwebinartoreflectonthepotentiallessonsfromthecrisis.TheseinsightfuldiscussionsledtothecreationofthiseBook,whichbringstogethereminentscholarsandCEPRresearcherswhowitnessedfirst-handthefallout,botheconomicandpolitical,ofcountriesintheEuropeanUnion.Manyofthecontributorshavesincebeeninvolvedinmanaging,designinganddebatingthemakingoftheEuropeanmonetarysystemoverthelastthreedecades. TheeBookdiscussestheoriginsofthecrisisandframesitwithinabroaderEuropeanhistoricalandpoliticalperspective.Itconsiderstheunderlyingcauses–Germanreunification,thestruggleformonetarycooperation,theinstabilityofafixedexchangerateregimeundercapitalmobility–whichultimatelyledtothebreakdownofaflawedsystem.Fromdisastertorevival,theeBookexplainswhythecrisiswassuchawatershedmomentforEuropeaneconomicpolicyformationandtracesthegrowthandsubsequentconstructionofamorerobustEuropeanmonetarysystem.IthighlightshowthetraumaoftheERMcrisismayhavebeentheimpulseneededtoreinforcetheultimateadoptionofasingle,commoncurrencyintheformoftheeuro.Inthefollowingdecades,theeBookshowshowlessonsfromthecrisishaveremainedpertinent,influencingtheoriesofcurrencycrisisandthedevelopmentofinstr