oussama94
05-28-2017, 19:43
Until mid-1992, the ERM appeared to be a success, as a disciplinary effect
had reduced inflation throughout Europe under the leadership of the
German Bundesbank. The stability wouldn’t last, however, as international
investors started worrying that the exchange rate values of several
currencies within the ERM were inappropriate. Following German reuni-
fication in 1989, the nation’s government spending surged, forcing the
Bundesbank to print more money. This led to higher inflation and left the
German central bank with little choice but to increase interest rates. But
the rate hike had additional repercussions—because it placed upward pressure
on the German mark. This forced other central banks to raise their interest
rates as well, so as to maintain the pegged currency exchange rates
(a direct application of Irving Fisher’s interest rate parity theory). Realizing
that the United Kingdom’s weak economy and high unemployment rate
would not permit the British government to maintain this policy for long,
George Soros stepped into action.
had reduced inflation throughout Europe under the leadership of the
German Bundesbank. The stability wouldn’t last, however, as international
investors started worrying that the exchange rate values of several
currencies within the ERM were inappropriate. Following German reuni-
fication in 1989, the nation’s government spending surged, forcing the
Bundesbank to print more money. This led to higher inflation and left the
German central bank with little choice but to increase interest rates. But
the rate hike had additional repercussions—because it placed upward pressure
on the German mark. This forced other central banks to raise their interest
rates as well, so as to maintain the pegged currency exchange rates
(a direct application of Irving Fisher’s interest rate parity theory). Realizing
that the United Kingdom’s weak economy and high unemployment rate
would not permit the British government to maintain this policy for long,
George Soros stepped into action.