Currency Wars

September 23, 1992

Management of major world economies has turned into the equivalent of a fraternity food fight. The latest currency to get it in the face is the French franc. Smelling blood after making a killing on the British pound and the Italian lira, speculators are tossing whatever slop they can get their hands on against a currency that, in a rational world, should be able to stand up to the onslaught.

France has perhaps the best economic fundamentals in all of Europe, but one thing it does not possess is the mighty German deutsche mark. And so, after barely approving the Maastricht Treaty that theoretically sets Europe off in pursuit of a common currency, France finds its noble franc under the same kind of attack that forced Britain and Italy to withdraw last week from the European Community's Exchange Rate Mechanism.

The currency markets have rediscovered the old truism that when governments try to keep their currencies aligned at arbitrary fixed rates, sooner or later the whole contraption will break. That is what is happening to the ERM, and may be happening to the whole idea of a united Europe.

What to do? The British say they are going to float the pound and not consider re-entering the ERM until a European summit next month reforms the present system. The Germans retort that the British can't come back until they agree to stick to current rules. The Americans, with their downward floating dollar, say why not set the value of various currencies against gold and a basket of other commodities. The Germans say, nothing doing, then start talking about a two-tiered European system of weak- and strong-currency countries. Guess who is king of the strong.

If this sounds like financial bedlam, that's exactly what it is. Finance ministers gathered in Washington for their annual comity charade find the director of the International Monetary Fund at odds with his American hosts. He wants the United States to raise interest rates, an unthinkable thought in a presidential campaign. The Americans want the IMF to get off its austerity kick and get behind fiscal stimulus. Inflation is secondary to the Americans, but uppermost to Germans, now in a position to challenge the U.S. by holding to high interest rates that have thrown their neighbors into turmoil and threaten a run on the dollar.

Meanwhile, Americans can't quite decide whether they prefer a Europe with sufficient political unity to stifle its murderous nationalisms or with sufficient economic disunity to become an easier competitor. And governments eveoywhere are too weak, too lacking in public support, too beset by recessionary pressures to act responsibly.

The world economic scene is one big mess.

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