The European Monetary System, 1979–87

With the demise of the first experiment in monetary union, many critics had proclaimed that the whole enterprise was ill-conceived and doomed to failure. Another attempt to revive the project was considered highly unlikely as long as the Bundesbank remained trenchantly opposed and diverging macroeconomic trends and policies continued to characterise the internal dynamics of the European Community (EC). Rumours of its demise, however, were greatly exaggerated. The renewed dollar crisis of 1978 provided a catalyst to launch a second experiment in March 1979. The American policy of “benign neglect” had allowed the dollar to slide which, in turn, generated a renewed phase of international volatility in financial and currency markets. The obvious threat to intra-Community exchange rate stability posed by this renewed speculative volatility convinced the newly elected Social Democratic government of Chancellor Schmidt that a new exchange rate regime was required within the Community. This became even more urgent after the failure of German-US measures to stabilise the dollar. With the recent election of President d’Estaing of France, Schmidt had found an accommodating ally in reviving the EMU project.