Int’l Monetary Crisis - III

Nationalist Battles & Domestic Forces



$  articles from section E on the Fall of 1987

$  articles from section F on 1992-1993 EMS Crisis


Turning Points

$  Five important turning points:

¢  1. Formation of EMS & ERM in 1979

¢  2. Carter-Reagan-Volcker tight money that drove dollar skyward and touched off Great Depresion of

          ‘80s, debt crisis, and lost decade of development

¢  3. 1985 Plaza Agreement when G-7 agreed to drive the dollar down

¢  4. Fall 1987 Crisis (Stock Market Crash, drop in dollar that led to G-7 effort to stabilize it

¢  5. EMS Crisis of 1992 when UK & Italy withdrew from the ERM which led to German reversal of

           interest rate policy & widening of band


Fall 1987 Crisis

$  Feb ‘87 Louvre Accord to stabilize dollar after drop following Plaza Agreement in ‘85

$  Spring - Summer 1987 G-7 Central banks spend some $70 billion to achieve this

$  Fall 1987: agreement to discord

¢  US vs Germany

¢  US wanted Germany to stimulate its economy

¢  Germany wanted US to reduce Fed. deficit


US Govt Desires

$  US demand that Germany stimulate econ.

¢  to increase growth

¢  to increase demand for US exports to help reduce US trade deficit

$  Continuing problems in US with competiveness

¢  wages had dropped, BUT

¢  slow growth in quality

¢  slow growth in productivity

¢  speculative instead of productive investment

¢  crisis of Keynesian period unsolved


German Govt Desires

$  Desire for reduction in US fed. budget deficit

¢  seen as sucking up savings (crowding out)

¢  seen as keeping interest rates high everywhere

$  Reluctance to ¯ rates & stimulate econ.

¢  fear of “inflation”, which really meant:

¢  fear of German working class

$  ability to raise wages & benefits

$  1984 I.G.Metall had struck for less work & ­ wages



$  Baker proposed “commodity index”, but nobody went along with it

$  Fed raised interest rates

$  Bundesbank responded by raising its rates

$  Baker threatened to let dollar float downward against DM & other European currencies









$  Late October report of ≠ US trade deficit

$  Oct 19th: Stock Market Crash

$  Called “Black Monday” (after 1929 Crash)

$  US did let $ depreciate rapidly,

$  Interest rates continued to rise, bond prices to fall,

$  Conflict with German Govt intensified



$  White House and Congress came to agreement on budget deficit reduction

¢  increasing consensus on attacking welfare state, social programs, not defense etc.

$  Germany responded by cutting interest rates, tit for tat

¢  allowing some stimulation

¢  allowing some increase in imports of US goods


Dec ‘87 - Jan ‘88

$  December: G-7 agreed to stabilize dollar, i.e., not  allow it to fall further

$  G-7 implements agreement with massive central bank dollar purchases

$  Increase in demand for dollar brings drop to an end by early January 1988


ERM Crisis - Background - I

$  Collapse of Wall & Communism (1989)

¢  driven by grassroots struggle

¢  underground resistance emerged above ground

$  German reunification

¢  driven by grassroots migration from East to West Germany, via Hungary then thru broken Wall

¢  East Germans refused requests to stop coming

¢  only stopped by reunification & promises


ERM Crisis Background - II

$  Germany decided to finance reunification via borrowing

$  cost expected to > $100 billion

$  cost high because:

¢  1 - 1 currency conversion

¢  labor achieved leveling up

¢  Kohl’s desire to avoid raising taxes


ERM Crisis Background - III

$  Strikes for wage ­ in Germany in April &May, 1990

$  Maastricht Treaty, 1990

¢  Danish rejection in June

¢  Near French rejection in Summer

$  Opposition Gathering in Venice 1991

$  Anti-immigrant riots/murders in Germany

$  All symptoms of discontent with high unemployment and falling real wages


ERM Crisis

$  Sept 13, 1992: Italians  devalued lire

$  Sept 15: Slight cut in German interest rate

$  Speculative attack on £ (pound) forces UK to pull out of EMS, govt floats £ & cuts i

$  UK followed by Italy & then by Spain

$  EMS has ruptured!


Crisis Þ Attack on Germany

$  Intensified attack on German monetary policy for tight money, high rates

$  Walter Russel Mead in Foreign Affairs says unification financed by high rates

$  Moelleman responds NO, not so, high rates are for hot money, long term rates are similar to US rates



$  UK pulls out, cuts interest rates

$  by Jan 1993, rates cut to lowest level since 1977

$  Kohl seeks “solidarity pact” with labor to allow cuts in wages and social services

$  German business accelerates movement into Eastern Europe with its low wages

$  Feb 1994: Speculative attack fores Ireland to devalue punt

$  Feb 1994: French attack on “social dumping”by UK


“Social Dumping?”

$  Hoover moves from France to Scotland

$  French accuse firm & UK of “social dumping” = low wage/benefits to undercut

$  Low wages & benefits result of sucess of Thatcher attacks on UK workers

$  Wall Street Journal editorial calls for “leveling down” instead of up!

$  Feb: Bundesbank lowers interest rates

$  Aug: ERM widens band to ±15%, UK out


Peso Crisis Articles

$  Until packet becomes available, you can read most of the material at URL:

$  gopher to eco dept, mailing lists, Chiapas95, Peso Crisis/

$  Or, go to http:February 14, 2003/ and look for the section on “The Peso Crisis” with a hotlinkto the articles.