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Time - Man of the Year
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1993-04-08
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THE WEEK, Page 20WORLDEurope's Common Crisis: Money
Under speculators' attack, the E.C. fails to hold its currencies
together
With the spectacle of seeming chaos in its currency markets,
Western Europe is giving the rest of the world a vivid lesson in
the connection between economics and politics. Eleven of the 12
European Community states have been trying to keep the value of
their money linked together while pursuing divergent domestic
policies and grappling with distinct national problems.
Inevitably, these internal stresses -- aggravated by
well-heeled speculators -- broke the E.C.'s system of guaranteed
exchange rates, forcing Britain and Italy to drop out.
Some sort of currency crack-up had seemed likely for
months -- especially to the speculators. Germany's high interest
rates, designed to hold down inflation while attracting
investors to pay for rebuilding the former East Germany, angered
Bonn's European partners, most of whom are fighting recession
and prefer low rates to foster growth.
Heavy betting against the exchange system began as the
Sept. 20 French referendum on the Maastricht treaty approached.
If the result of this vote on the package of new steps toward
European economic unity were to be non, no one wanted to be
caught holding a weak currency. Banks, pension funds and private
investors began selling off Italian lire, and Italy, fearful of
depleting foreign reserves, was forced to devalue its currency
7%.
Then, after much roaring over a forthcoming cut in its
interest rates, the German Bundesbank delivered a monetary mouse
-- a reduction of only one-quarter of 1% in its key rate. That
did more harm than good, and currency traders resumed dumping
lire and billions of British pounds. In London Prime Minister
John Major's government, determined to stay with the E.C.
system in the face of the pound's continued fall, tried to lure
investors at midweek with an increase in the Bank of England's
interest rate, from 10% to 12%. Even when, in desperation, the
rate was pumped to 15%, speculators went on selling pounds and
buying marks. The government gave in, pulling the pound out of
the exchange system and canceling its rate increases.
Italy dropped out the next day, promising an early return.
As the tumultuous week ended, speculators turned their
attention to the French franc, the Irish punt and the Danish
krone, all of which neared the bottom of their permitted range
in the E.C. exchange mechanism.
For all the public drama and the political damage to the
governments involved, the crisis remained chiefly a European
one. It can be repaired, but probably only after the E.C. agrees
to broader, more flexible links for its exchange rates. That
kind of loosening could slow plans for a single E.C. currency.