Int’l Monetary Crisis - III
Nationalist Battles & Domestic
Forces
Readings
$ 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
September
$ 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
October
$ 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
November
$ 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
Chronicle
$ 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/www.eco.utexas.edu/faculty/Cleaver/chiapas95.html and
look for the section on “The Peso Crisis” with a hotlinkto the articles.
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