Black September (1992)

The agony of ratification had important consequences. Under the influence of the political momentum towards integration markets reflected a fairly general assumption that establishment of Economic and Monetary Union at an early date was almost certain. This prospect created the illusion that a kind of quasi monetary union was already in place, with realignments of central rates no longer likely. After all, none had taken place since the Basle-Nyborg Agreement of 1987. This certainty disappeared after the first Danish referendum. It was now realised that while no realignments had taken place for five years, inflation differentials in member countries had remained considerable, and competitive positions of high inflation countries had worsened as a result. The Italian lira in particular was clearly overvalued. So, if to a lesser extent, it was felt, was the pound. These and other currencies now came under pressure. The rules of behaviour agreed in Basle-Nyborg would have required the monetary authorities concerned, if they felt exchange rates were correct, to raise interest rates in their defence. But the worsening conjunctural situation made them reluctant to do so.