The Setting up of the “Snake”

In spite of the fact that the Smithsonian agreements were hailed as a new founding treaty for the international monetary system, they would very soon prove to be illusory�

At the beginning of February 1972 Georges Pompidou wrote a letter to Richard Nixon, complaining that the US was not defending the agreement as promised in the Azores�³¹ During a meeting held at the end of March in Washington, the German State Secretary Egon Bahr expressed to Henry Kissinger the need to avoid any further currency crisis in 1972, since the Europeans “would move away from the dollar completely and establish a separate reserve basis”�³²

29 Guasconi, M� E�, L’Europa tra continuità e cambiamento, p� 137-8�

30 Ibid�, p� 138�

31 National Archives, College Park, USA, Nixon Presidential Material Staff, National Security Council (NSC) Files, Box 356 Monetary Matters, Letter from Georges Pompidou to Richard Nixon, February 4, 1972�

32 National Archives, College Park, USA, Nixon Presidential Material Staff, National Security Council (NSC) Files, Box 685, Germany, Memorandum of a conversation between Egon Bahr, Rolf Pauls, Henry Kissinger, Martin Hillenbrand and Helmut Sonnenfeldt, March 28, 1972� Secret�

In the following months the goal of achieving monetary cooperation became for the Europeans the “priority of priorities”, whose realization would condition the Common Market’s survival�³³ At the Paris summit of October 1972, the EC heads of state and government once again affirmed their determination to achieve the goal of establishing a European Monetary Union�

However, the achievement of stronger monetary cooperation was not around the corner� In spite of European efforts towards greater monetary cooperation, in the following months the Americans did very little to defend the new parities and the Smithsonian agreements, so that most of the efforts to resist speculation had to stem from the Europeans, in particular from West Germany� In July 1972, the German Minister of Finance, Helmut Schmidt, expressed very clearly to Henry Kissinger German concern and disappointment at the monetary policy pursued by the US� “Billions of dollars are floating about the world and Germany is taking in too many of them”, affirmed Schmidt� In particular Bonn was very worried about the risk of inflation and firmly asked the US to defend the Smithsonian agreements�³⁴

The instability of the international monetary system and US passivity in the international monetary area convinced the European governments to achieve an agreement on monetary cooperation�³⁵ In April 24, the six EC members decided to establish a “snake”, which linked their currencies and their central banks, in a common attitude towards the US� The snake represented a commitment by the Six to keep their exchange rates within 2�25% of each other by using periodic exchanges of assets linked to gold and to foreign exchange� This range of fluctuations reduced the range of flexibility among the EC currencies as well as between the EC currencies and the dollar�³⁶ In addition, the candidate countries which would enter the EC in January 1973, the UK, Denmark and Ireland, took part in the “snake”� One year later, in April 1973, a European reserve fund was established which required regular contacts between monetary decision-makers to coordinate their policies� The central banks of the snake members were bound to intervene and grant short term credit facilities in order to defend the exchange parities�

33 Guasconi, M� E�, L’Europa tra continuità e cambiamento, p� 140�

34 National Archives, College Park, USA, Nixon Presidential Material Staff, National Security Council (NSC) Files, Box 685, Germany, Memorandum of conversation between Helmut Schmidt and Henry Kissinger, July 20, 1972� Secret�

35 National Archives, College Park, USA, Nixon Presidential Material Staff, National Security Council (NSC) Files, Box 356 Monetary matters, Memorandum for Henry Kissinger from Robert Hormats, August 2, 1972� Secret�

36 Bussière, E�, “International monetary system crisis”, p� 181�

As a consequence, one of the major problems of the snake was the organization of solidarity among the European countries and their central banks� With the Americans which did very little to defend the new exchange parities, the burden to resist speculation weighed mainly on European and in particular on German’ shoulders� For weak-currency countries, such as Italy, participation in the snake was simply too expensive, in terms of reserves to be spent to defend the parities and a heavy constraint in their domestic economic policy³⁷�

4. Conclusions

In a conversation with Richard Nixon and Henry Kissinger held on October 1, 1973, a few days before the Yom Kippur War, the President of the European Commission, François Xavier Ortoli, affirmed: “I think that the monetary question hangs above us like an atomic cloud� And it is very important that it be resolved, not just for us but for the rest of the world�”³⁸

Ortoli’s words expressed very clearly the worries shared by the European governments about the instability of the monetary system� In fact, the life of the snake proved to be very difficult� In June 1972 the British pound left the snake, followed by the Italian lira in February 1973 and the French franc in 1974� Only the deutschmark, the Dutch guilder and the Belgian franc remained inside the snake� In March 1973 the EC members (excluding Italy) decided on a joint float and on ceasing to buy dollars� Inflation was rampant and the commodity market was in chaos well before the oil shock of October 1973�

However, the final blow to the snake’s life was represented by the oil crisis of October 1973, which diminished hope for a quick reform of the international monetary system and forced France to leave it in January 1974, thus transforming it in a deutschmark zone�

In spite of the snake’s short and difficult life, this experiment represented a turning point for European monetary cooperation� The goal of stronger monetary cooperation would now be pursued energetically by the European leaders, especially by the two former Finance Ministers,

37 Kreile, M�, The search for a New Monetary System, in Haftendorn, H�, Soutou, G�-H�, Szabo, F�  & Wells, S� (eds�), The Strategic Triange, p� 163.

38 National Archives, College Park, USA, Nixon Presidential Material Staff, National Security Council (NSC) Files, Box 322, European Common Market, Memorandum of conversation between Richard Nixon, Henry Kissinger and François-Xavier Ortoli, October 1, 1973� Secret�

the German Helmut Schmidt and the French Valéry Giscard d’Estaing, who would play a dominant role in the establishment in 1978 of the European Monetary System, which can be considered the first nucleus of the monetary union launched in 1999�

Giovanni Battista PittaluGa

The European Monetary System has been an exchange rate agreement between the main European countries, in force from 1979 to 1992� The reasons for its creation were mainly political� With its establishment the founders wanted to give new impetus to the political cohesion among European countries and make a further step towards a European political union�

The initiative of the project was essentially Franco-German� The other founding countries, primarily Italy, joined this project mainly because they were linked to the two promoting countries by economic ties (the Customs Union) and foreign policy (the Atlantic Alliance)�

Within the EMS two phases are usually identified� The one between 1979 and 1986, called the “flexible” EMS and marked by numerous realignment of parity, and that between 1987 and 1992, called the “rigid”

EMS, in which realignments were substantially absent�

In this paper we try to give answers to two main questions: the EMS has been a success or a failure? What were the causes of the 1992 crisis of the EMS and its substantial collapse?

The first section discusses the reasons for the setting up of the EMS and its institutional architecture� The second section describes how the EMS actually worked� In the third section we try to answer the question whether the EMS has been a successful historical experience� The reasons of the 1992 crisis are dealt with in the fourth section� In the conclusion we briefly retrace the arguments made in the preceding sections and draw some policy indications�

1 I want to thank Elena Seghezza for the comments on the first version of this contribution�