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The EMS Crisis of the 1990s: Parallels with the present crisis?

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  • Gros, Daniel

Abstract

The EMS crisis of the 1990s illustrated the importance of a lack of confidence in price or exchange rate stability, whereas the present crisis illustrates the importance of a lack of confidence in fiscal sustainability. Theoretically the difference between the two should be minor since, in terms of the real return to an investor, the loss of purchasing power can be the same when inflation is unexpectedly high, or when the nominal value of government debt is cut in a formal default. Experience has shown, however, that expropriation via a formal default is much more disruptive than via inflation. The paper starts by providing a brief review of the EMS crisis, emphasising that the most interesting period might be the ‘post-EMS’ crisis of 1993-95. It then reviews in section 2 the crisis factors, comparing the EMS crisis to today’s euro crisis. Section 3 outlines the main analytical issue, namely the potential instability of high public debt within and outside a monetary union. Section 4 then compares the pressure on public finance coming from the crises for the case of Italy. Section 5 uses data on ‘foreign currency’ debt to disentangle expectations of devaluation/inflation from expectations of default. Section 6 concludes.

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  • Gros, Daniel, 2014. "The EMS Crisis of the 1990s: Parallels with the present crisis?," CEPS Papers 9119, Centre for European Policy Studies.
  • Handle: RePEc:eps:cepswp:9119
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    9. repec:rnp:ecopol:09111 is not listed on IDEAS
    10. Gros, Daniel, 2012. "A simple model of multiple equilibria and sovereign default," CEPS Papers 7174, Centre for European Policy Studies.
    11. Kopf, Christian, 2011. "Restoring financial stability in the euro area," CEPS Papers 4292, Centre for European Policy Studies.
    12. Gros, Daniel, 2011. "Speculative Attacks within or outside a Monetary Union: Default versus Inflation (what to do today)," CEPS Papers 6359, Centre for European Policy Studies.
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    Cited by:

    1. Eichengreen, Barry & Naef, Alain, 2022. "Imported or home grown? The 1992–3 EMS crisis," Journal of International Economics, Elsevier, vol. 138(C).
    2. Nöh, Lukas, 2019. "Increasing public debt and the role of central bank independence for debt maturities," European Economic Review, Elsevier, vol. 119(C), pages 179-198.

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