Int

1
Intl Monetary Crisis - III

• Nationalist Battles Domestic Forces

2
Readings

• articles from section E on the Fall of 1987
• articles from section F on 1992-1993 EMS Crisis

3
Turning Points

• Five important turning points
• 1. Formation of EMS ERM in 1979
• 2. Carter-Reagan-Volcker tight money that drove
  dollar skyward and touched off Great Depresion of
  80s, debt crisis, and lost decade of development
• 3. 1985 Plaza Agreement when G-7 agreed to drive
  the dollar down
• 4. Fall 1987 Crisis (Stock Market Crash, drop in
  dollar that led to G-7 effort to stabilize it
• 5. EMS Crisis of 1992 when UK Italy withdrew
  from the ERM which led to German reversal of
  interest rate policy widening of band

4
Fall 1987 Crisis

• Feb 87 Louvre Accord to stabilize dollar after
  drop following Plaza Agreement in 85
• Spring - Summer 1987 G-7 Central banks spend some
  70 billion to achieve this
• Fall 1987 agreement to discord
• US vs Germany
• US wanted Germany to stimulate its economy
• Germany wanted US to reduce Fed. deficit

5
US Govt Desires

• US demand that Germany stimulate econ.
• to increase growth
• to increase demand for US exports to help reduce
  US trade deficit
• Continuing problems in US with competiveness
• wages had dropped, BUT
• slow growth in quality
• slow growth in productivity
• speculative instead of productive investment
• crisis of Keynesian period unsolved

6
German Govt Desires

• Desire for reduction in US fed. budget deficit
• seen as sucking up savings (crowding out)
• seen as keeping interest rates high everywhere
• Reluctance to ? rates stimulate econ.
• fear of inflation, which really meant
• fear of German working class
• ability to raise wages benefits
• 1984 I.G.Metall had struck for less work ? wages

7
September

• Baker proposed commodity index, but nobody went
  along with it
• Fed raised interest rates
• Bundesbank responded by raising its rates
• Baker threatened to let dollar float downward
  against DM other European currencies

8
October

• Late October report of US trade deficit
• Oct 19th Stock Market Crash
• Called Black Monday (after 1929 Crash)
• US did let depreciate rapidly,
• Interest rates continued to rise, bond prices to
  fall,
• Conflict with German Govt intensified

9
November

• White House and Congress came to agreement on
  budget deficit reduction
• increasing consensus on attacking welfare state,
  social programs, not defense etc.
• Germany responded by cutting interest rates, tit
  for tat
• allowing some stimulation
• allowing some increase in imports of US goods

10
Dec 87 - Jan 88

• December G-7 agreed to stabilize dollar, i.e.,
  not allow it to fall further
• G-7 implements agreement with massive central
  bank dollar purchases
• Increase in demand for dollar brings drop to an
  end by early January 1988

11
ERM Crisis - Background - I

• Collapse of Wall Communism (1989)
• driven by grassroots struggle
• underground resistance emerged above ground
• German reunification
• driven by grassroots migration from East to West
  Germany, via Hungary then thru broken Wall
• East Germans refused requests to stop coming
• only stopped by reunification promises

12
ERM Crisis Background - II

• Germany decided to finance reunification via
  borrowing
• cost expected to gt 100 billion
• cost high because
• 1 - 1 currency conversion
• labor achieved leveling up
• Kohls desire to avoid raising taxes

13
ERM Crisis Background - III

• Strikes for wage ? in Germany in April May, 1990
• Maastricht Treaty, 1990
• Danish rejection in June
• Near French rejection in Summer
• Opposition Gathering in Venice 1991
• Anti-immigrant riots/murders in Germany
• All symptoms of discontent with high unemployment
  and falling real wages

14
ERM Crisis

• Sept 13, 1992 Italians devalued lire
• Sept 15 Slight cut in German interest rate
• Speculative attack on (pound) forces UK to pull
  out of EMS, govt floats cuts i
• UK followed by Italy then by Spain
• EMS has ruptured!

15
Crisis ? Attack on Germany

• Intensified attack on German monetary policy for
  tight money, high rates
• Walter Russel Mead in Foreign Affairs says
  unification financed by high rates
• Moelleman responds NO, not so, high rates are for
  hot money, long term rates are similar to US rates

16
Chronicle

• UK pulls out, cuts interest rates
• by Jan 1993, rates cut to lowest level since 1977
• Kohl seeks solidarity pact with labor to allow
  cuts in wages and social services
• German business accelerates movement into Eastern
  Europe with its low wages
• Feb 1994 Speculative attack fores Ireland to
  devalue punt
• Feb 1994 French attack on social dumpingby UK

17
Social Dumping?

• Hoover moves from France to Scotland
• French accuse firm UK of social dumping low
  wage/benefits to undercut
• Low wages benefits result of sucess of Thatcher
  attacks on UK workers
• Wall Street Journal editorial calls for leveling
  down instead of up!
• Feb Bundesbank lowers interest rates
• Aug ERM widens band to 15, UK out\

18
Peso Crisis Articles

• Until packet becomes available, you can read most
  of the material at URL
• gopher to eco dept, mailing lists, Chiapas95,
  Peso Crisis/
• Or, go to http//www.eco.utexas.edu/faculty/Cleave
  r/chiapas95.html and look for the section on The
  Peso Crisis with a hotlink to the articles.

19
--END--