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

The Making of the European Monetary Union: 30 years since the ERM crisisEdited by Giancarlo Corsetti, Galina Hale, Beatrice Weder di Mauro3030 The Making of the European Monetary Union30 Years Since the ERM CrisisWITH SUPPORT OF CEPR PARIS FOUNDING PARTNERS CEPR PRESSCentre for Economic Policy Research33 Great Sutton StreetLondon, EC1V 0DX, UK187 boulevard Saint-Germain75007, Paris, FranceTel: +44 (0)20 7183 8801Email: cepr@cepr.orgWeb: www.cepr.org ISBN: 978-1-912179-68-8Copyright © CEPR Press, 2023 The Making of the European Monetary Union30 Years Since the ERM CrisisEdited by Giancarlo Corsetti, Galina Hale and Beatrice Weder Di Mauro CENTRE FOR ECONOMIC POLICY RESEARCH (CEPR)The Centre for Economic Policy Research (CEPR) is a network of over 1,700 research economists based mostly in European universities. The Centre’s goal is twofold: to promote world-class research, and to get the policy-relevant results into the hands of key decision-makers. CEPR’s guiding principle is ‘Research excellence with policy relevance’. It was founded in the UK in 1983, where it is a Charity, and in November 2019 CEPR initiated the creation of an Association under French law, in order to provide a vehicle for an expansion in France. The members of the Conseil d’Administration of the Association are identical to the UK Board of Trustees.CEPR is independent of all public and private interest groups. It takes no institutional stand on economic policy matters and its core funding comes from its Institutional Members, projects that it runs and sales of publications. Because it draws on such a large network of researchers, its output reflects a broad spectrum of individual viewpoints as well as perspectives drawn from civil society. CEPR research may include views on policy, but the Trustees/members of the Conseil d’Administration of the Association do not give prior review to its publications. The opinions expressed in this report are those of the authors and not those of CEPR.Chair of the Board Sir Charlie BeanFounder and Honorary President Richard PortesPresident Beatrice Weder di MauroVice Presidents Maristella Botticini Philippe Martin Ugo Panizza Mar Reguant Hélène ReyChief Executive Officer Tessa Ogden ContentsForeword viiThe trauma of the European currency crises in the 1990s and its consequences until today 1Giancarlo Corsetti, Galina Hale and Beatrice Weder Di MauroPart 1: From Bretton Woods to the ERM1 Thirty years after the ERM crisis 13Barry Eichengreen2 Why is the European currency and financial crisis of the 1990s relevant today? 17Giancarlo Corsetti3 A small currency in the ERM zone of monetary instability 25Patrick Honohan4 The European Monetary System crisis of 1992 31Richard PortesPart 2: 1992 – Ground Zero5 The ERM crisis and the UK: Black or White Wednesday? 39Sir Charlie Bean6 The ERM crisis: A teachable episode for international macro 43Catherine Mann7 The backdrop of the ERM crisis 47Maurice Obstfeld8 Italy and the crisis of the European Monetary System 53Ignazio ViscoPart 3: A decade of optimism9 From 1999 (and before) to 2007: A decade of optimism or a lost decade? 61Charles Wyplosz10 One good reason we were optimistic: The rise of inflation targeting and the demise of fixed exchange rate crises 67Andrew K. Rose Part 4: A decade of crisis in the euro area11 The end of euro area crises? 73Paul De Grauwe12 A decade of crisis in the euro area: How can one reconcile price stability with a monetary backstop for government debt? 81Olivier Jeanne13 When Europe catches a cold, the rest of the world sneezes: Global spillovers of the euro crises 87Ozge Akinci and Paolo Pesenti14 Thirty years since the ERM crisis: The beginning of the end 95Lorenzo Bini Smaghi15 Lessons from the European Monetary System Crisis for European Monetary Union 99Philip R. LanePart 5: The next decade16 Thirty years on, new frontiers for Europe’s monetary cooperation 109Martin Sandbu17 The architecture of the euro: Prospects for the next decade 113Jeromin Zettelmeyer18 Future challenges to European sovereign debt markets 121Leonardo D’Amico, Francesco Giavazzi, Veronica Guerrieri and Guido Lorenzoni ForewordSeptember 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