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Snake in the tunnel

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Title: Snake in the tunnel  
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Snake in the tunnel

The snake in the tunnel was the first attempt at European monetary cooperation in the 1970s, aiming at limiting fluctuations between different European currencies. It was an attempt at creating a single currency band for the European Economic Community (EEC), essentially pegging all the EEC currencies to one another.

Pierre Werner presented a report on economic and monetary union to the EEC on 8 October 1970.[1] The first of three recommended steps involved the coordination of economic policies and a reduction in fluctuations between European currencies.[2][3]

With the failure of the Bretton Woods system with the Nixon shock in 1971, the Smithsonian agreement set bands of ±2.25% for currencies to move relative to their central rate against the US dollar. This provided a tunnel in which European currencies to trade. However, it implied much larger bands in which they could move against each other: for example if currency A started at the bottom of its band it could appreciate by 4.5% against the dollar, while if currency B started at the top of its band it could depreciate by 4.5% against the dollar.[4]

If both happened simultaneously, then currency A would appreciate by 9% against currency B. This was seen as excessive, and the Basel agreement in 1972[4] between the six existing EEC members and three about to join established a snake in the tunnel with bilateral margins between their currencies limited to 2.25%, implying a maximum change between any two currencies of 4.5%, and with all the currencies tending to move together against the dollar.[5] This agreement also led to the formal end of the Sterling Area.

The tunnel collapsed in 1973 when the US dollar floated freely. The snake proved unsustainable, with several currencies leaving and in some cases rejoining. By 1977, it had become a Deutsche Mark zone with just the Belgian and Luxembourg franc, the Dutch guilder and the Danish krone tracking it. The Werner plan was abandoned.[3]

The European Monetary System followed the "snake" as a system for monetary coordination in the EEC.

References

  1. ^ Werner report in OJEC
  2. ^ The European Monetary System, accessed on 2010-06-01.
  3. ^ a b European Parliament: The historical development of monetary integration, accessed on 2010-06-01.
  4. ^ a b European currency snake a picture available on CVCE website
  5. ^ The Road to Monetary Union
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