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TitleCurrency Politics: The Political Economy of Exchange Rate Policy
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Total Pages318
Table of Contents
INTRODUCTION The Political Economy of Currency Choice
CHAPTER 1 A Theory of Currency Policy Preferences
CHAPTER 2 The United States: From Greenbacks to Gold, 1862–79
CHAPTER 3 The United States: Silver Threats among the Gold, 1880–96
CHAPTER 4 European Monetary Integration: From Bretton Woods to the Euro and Beyond
CHAPTER 5 Latin American Currency Policy, 1970–2010
CHAPTER 6 The Political Economy of Latin American Currency Crises
CHAPTER 7 The Politics of Exchange Rates: Implications and Extensions
Document Text Contents
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Page 159


Chapter 4

gous rise in the (foreign- currency) price of exports, nor does a deprecia-
tion significantly increase (domestic- currency) export prices. In these
instances, currency volatility can be quite costly. Exporters of special-
ized, product- differentiated manufactured goods—typically some of
the most important European exporters—therefore are less likely to
want a weak exchange rate and more likely to value currency stability.
This masks much nuance and complexity, of course. There are firms for
which the trade- off between reduced currency volatility and the loss of
exchange rate autonomy is not clear, either because both or neither is
important. And I have ignored the interests of nontradable producers,
such as public sector employees and small businesses, which usually
favor maintaining monetary policy autonomy rather than sacrificing it
to stabilize currency values that have little direct impact on them.

An added complication is that as the member states moved toward
the euro, preferences over national policy began to mix with expecta-
tions about the euro. There is evidence, for instance, that some German
export- oriented manufacturers welcomed the euro because they antici-
pated that it would be weaker than the purely German DM.12

The principal goal of this chapter, then, is to identify the distribu-
tional effects and political lineup relevant to the making of European
exchange rate policy. Specifically, I hold that the main supporters of
fixing European exchange rates were firms and industries with major
cross- border investments, markets, or other business interests, while
the primary opponents were producers of standardized import-
competing and export products. I expect the support of the former for
fixing exchange rates to be relatively constant, while the opposition of
the latter should increase at times of a real appreciation and associated
competitive difficulties for national producers.13 My focus on special
interest considerations is not meant to deny the potential significance

12 For detail on German exchange rate politics, see Kinderman 2008.
13 Again, all this ignores much detail. One of the more interesting features of the run- up to the

EMU was that import competers in the likely core increasingly came to insist on including the
periphery—especially Italy and Spain—in order to eliminate the possibility of such competi-
tive depreciations as those of 1992–93. Perhaps most striking in this regard is the position of
import- competing French industries, which went from opponents of the EMS in the early
1980s to strong supporters of a broad EMU by the mid- 1990s. In the former period, EMS
membership ruled out a French devaluation and led to a real appreciation; in the latter period,
Italian and Spanish nonmembership in the EMU would have allowed them to depreciate
against the franc, again causing a real appreciation of the French currency. The result was that
potentially affected firms switched from opposition to French membership in the EMS to
strong support for the inclusion of the entire European Union in the EMU.

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European Monetary Integration

of other factors. It is to demonstrate instead that the political economy
of European monetary integration can be analyzed in a much broader
context, as part of the political economy of exchange rate policy more

The Course of European Monetary
Integration, 1969–99: From Qualified

Failure to Skepticism to Qualified Success

Discussions within the European Union over the possibility of stabiliz-
ing exchange rates began only a few months after the signing of the
Treaty of Rome, which created the earliest incarnation of the European
Union.14 As fissures appeared in the Bretton Woods system, these talks
accelerated, culminating in the 1969 Werner Report. This report rec-
ommended the beginning of a process of monetary union among EU
members. Within a few weeks of its adoption, however, the Werner
Report’s recommendations were overtaken by the collapse of Bretton

In the confused months after the August 1971 US decision to go
off gold, EU member states resolved to hold their currencies within a
2.25 percent band against each other and allow this band to move
within a 4.5 percent band against the US dollar. This arrangement was
known as the “snake in the tunnel,” as EU currencies would wriggle
within a circumscribed range vis- à- vis the dollar. In addition to the six
member states, Great Britain, Ireland, and Denmark joined the snake
on May 1, 1972, to prepare for their entry into the union eight months
later. However, Britain and Ireland left the snake in June 1972; the
Danes left shortly thereafter, but rejoined in October.

The collapse of attempts to salvage an international fixed- rate
monetary regime in 1973 ended the tunnel aspects of the snake. From
then on, the European Union’s goal was to achieve a joint float of mem-
ber currencies against the dollar, without targeting how they would
move relative to the dollar. In other words, the only consideration from
1973 onward was intra- EU exchange rates.

14 On early monetary plans and developments, see Tsoukalis 1977, especially 51–111; Ypersele
1985, 31–45.

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