The Collapse of the Old EMS (1993)

As a result of Black Wednesday those who had trusted the authorities’ reassurances suffered huge losses; those who had not, made considerable gains. This could not fail to affect the authorities’ credibility, both in managing the ERM and in realising their intention of establishing EMU in accordance with the Maastricht Treaty, which continued its tortuous path of ratification in one country after another. The ERM had survived. But its management was bound to become far more difficult. Its prospects looked more uncertain than at any time since March 1983, when Mitterrand had made his choice for Europe, and seemed to depend on the extent to which member states continuing to participate could agree on the lessons to be drawn from the crisis. These lessons concerned above all the authorities’ ability to prevent speculation. Since none of the currencies remaining in the system was clearly misaligned, this had to be done in two ways. Interest rates had to be used to defend a currency, not as a last resort but at an early stage. And the possibility of losses had to be added to prospects of profits, making speculation involve a two-way risk.