Who Invokes the Escape Clause: The Political Determinants of the European Monetary System Realignments
Posted: 6 Dec 2011
Date Written: December 5, 2011
Abstract
The European Monetary System (EMS) was set up in 1979 as a step in the monetary integration of the European Community. At its core, the EMS worked as fixed but adjustable exchange rates and, despite its success in retaining country membership, it experienced a series of currency realignments against the German currency. This paper links the use of realignments to escape clauses in a monetary cooperation agreement and derives hypotheses about who and when is more likely to invoke such clauses. I argue that realignment behaviour is driven by credibility considerations for domestic monetary policy; implications for European trade; the institutional structure of the EMS and its centrality to the larger process of European integration; as well as the behaviors of the core nations – Germany and France. Using monthly data on exchange rate realignments for all EMS members from 1979 to 1993, I find strong support for the hypotheses.
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