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Press release: The Making of the European Monetary Union: 30 years since the ERM crisis

September 2022 marked the thirtieth anniversary of the Exchange Rate Mechanism (ERM) crisis, a seismic event which shook the continent and caused a severe recession to spread rapidly across European economies. A new CEPR eBook, with contributions from eminent scholars and CEPR researchers, many who witnessed first-hand the fallout, both economic and political, of countries in the European Union, discusses its origins, implications and wide-reaching consequences.

The eBook, edited by Giancarlo Corsetti (European University Institute and CEPR), Galina Hale (UC Santa Cruz and CEPR) and Beatrice Weder Di Mauro (Geneva Graduate Institute and CEPR) discusses the origins of the crisis and frames it within a broader European historical and political perspective. It considers the underlying causes – German reunification, the struggle for monetary cooperation, the instability of a fixed exchange rate regime under capital mobility – which ultimately led to the breakdown of a flawed system. From disaster to revival, the eBook explains why the crisis was such a watershed moment for European economic policy formation and traces the growth and subsequent construction of a more robust European monetary system. It highlights how the trauma of the ERM crisis, and the collapse of sterling instigated by George Soros & co., may have been the impulse needed to reinforce the ultimate adoption of a single, common currency in the form of the euro. However, the crisis changed the way Europe moved towards currency unification, technically and politically, with long lasting effects on its developments in the following decades.

In the following decades, the eBook shows how lessons from the crisis have remained pertinent, influencing theories of currency crisis and the development of instruments and institutions able to adequately respond to subsequent financial instability and debt crises. The authors reflect how the euro’s first decade was one of success, despite considerable scepticism, followed by a second decade of turmoil, which required immense political will to deliver the minimum necessary reforms and funding to prevent the union from falling apart. The eBook discusses the need for changes to further strengthen the institutional setup and discusses looming issues that the union will have to tackle, including common monetary policy in the context of high inflation that will shape perceptions about the ECB, as well as high investment needs for the energy, climate, and digital transitions.

Although the ERM crisis was over thirty years ago, this eBook demonstrates why it remains such a defining and pivotal moment in the history of European economic architecture. Its origins are unlikely to be forgotten and the lessons learned have helped shape the current monetary system, which against many expectations is today in a strong position.