The Exchange Rate Mechanism after the Basle/Nyborg Agreement

Abstract

The decision by the finance ministers of the European Union and central bank governors on 2 August 1993 to widen the margins in the European Exchange Rate Mechanism to 15 per cent was the culmination of a year, where one crisis succeeded the other. In reality this decision meant that the exchange rate cooperation as we have known it for more than 20 years ceased to exist, and was replaced by something much vaguer and less binding. I shall try here to present my personal view on three questions:

• Why did the system work well for so long?

• What went wrong in 1992?

• Would it be possible — and desirable — to re-establish the system?

• Would it be possible — and desirable — to re-establish the system? I shall put some weight on the practical and technical aspects of the problems, since they are not normally given much attention, but are nevertheless of considerable importance.