Revisiting the 1992-93 EMS crisis in the context of international political economy

This chapter revisits the sequence of events that led to the well-known 1992-93 crisis in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) in the context of international political economy. The EMS was the forerunner of the eurozone and the crisis to some extent laid the foundation for the emergence of the subsequent institutional European framework. From this point of view, the 1992-93 crisis of the EMS was part of the long European movement towards economic and political integration. In the early 1990s the EMS was surrounded by optimism and widely considered to be "the most ambitious experiment in the international monetary and exchange rate cooperation of the post-Bretton Woods era" (Buiter et al. 1998:1). Its crisis in 1992-93, which came just two years before the Mexican currency and financial crisis, led to a series of academic and political debates followed by numerous research outputs. These discussions were subsequently sent into oblivion as part of the unpleasant history of the European Monetary Union (EMU) project, and only revisited in order to draw lessons for the feasibility of a fixed exchange rate system in East Asia. This chapter reconsiders the 1992-93 crisis, trying to make a general point about the workings of monetary unions and contemporary financial markets. It must not be seen as an ex-post contribution to a lifeless debate, but as an approach from the perspective of international political economy to put forward a proper reasoning for the understanding of recent economic trends in capitalism. The lessons to be drawn could also help enhance and understanding of the contemporary crisis of the eurozone. The second section briefly revisits the historical background that led to the inauguration of the EMS in the late 1970s. The third section describes its economic characteristics. The analysis does not recycle mainstream economic ideas but puts forward economic reasoning emerging from the standpoint of political economy. The fourth section touches upon the workings of modern finance, focusing on the exchange rate market. In contemporary financial markets, foreign exchange is widely viewed and treated as a distinct class of asset; it will also become clear that the scope of a monetary union is necessarily based on the unrestricted and uncontrolled operation of the exchange rate market. Section five revisits the density of events that built up to the wide-range speculative attacks in September 1992. It also explains the reasons that necessitated the abandonment of the "hard" version of EMS. Section six attempts to draw a general lesson, useful not only for interpretation of the past but also for analysis of the most recent developments in the European Union (EU)