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

Abstract

September 2022 marked the thirtieth anniversary of the Exchange Rate Mechanism (ERM) crisis, a seismic event which shook the continent and caused a severe recession to spread rapidly across European economies. To mark the occasion, CEPR organised, in collaboration with the Pierre Werner Chair at the EUI, a two-part webinar to reflect on the potential lessons from the crisis. These insightful discussions led to the creation of this eBook, which brings together eminent scholars and CEPR researchers who witnessed first-hand the fallout, both economic and political, of countries in the European Union. Many of the contributors have since been involved in managing, designing and debating the making of the European monetary system over the last three decades. The eBook discusses the origins of the crisis and frames it within a broader European historical and political perspective. It considers the underlying causes – German reunification, the struggle for monetary cooperation, the instability of a fixed exchange rate regime under capital mobility – which ultimately led to the breakdown of a flawed system. From disaster to revival, the eBook explains why the crisis was such a watershed moment for European economic policy formation and traces the growth and subsequent construction of a more robust European monetary system. It highlights how the trauma of the ERM crisis may have been the impulse needed to reinforce the ultimate adoption of a single, common currency in the form of the euro. In the following decades, the eBook shows how lessons from the crisis have remained pertinent, influencing theories of currency crisis and the development of instruments and institutions able to adequately respond to subsequent financial instability and debt crises. The final section reflects on the need for changes to further strengthen the institutional setup.