EUROPEAN COMMUNITY: SEARCHING FOR EXCHANGE RATE STABILITY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83-00857R000100150002-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 19, 2016
• Document Release Date: February 9, 2007
• Sequence Number: 2
• Publication Date: October 1, 1982
• Content Type: REPORT

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Directorate of Confidential
Intelligence
Stability
European Community:
Searching for Exchange Rate
Confidential
EUR 82-10096
October 1982
COPY 3 3 a
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Directorate of
Intelligence
European Community:
Searchin for Exchange Rate
Stability
This paper was prepared byl f the
Office of European Analysis. Comments and queries
are welcome and may be directed to the Chief
Economic Issues Branch, EUR
National Intelligence Council.
Confidential
EUR 82-10096
October 1982
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Confidential
European Community:
Searchin for Exchange Rate
Stability
Key Judgments Establishment of the European Monetary System (EMS) by the European
Information available Community in 1979 reflected the conviction of EC leaders that stable
as of 15 September 1982 exchange rates are necessary to further economic integration. After three
was used in this report.
years of operation, the EMS is noteworthy in at least one respect: it has re-
mained intact with major currency participation longer than any of its
predecessors. On the other hand, it has not yet produced the exchange rate
stability that is its goal. The devaluation in June of the French franc within
the EMS-the sixth realignment of a participating currency since the start
of the system-highlights the degree of instability that remains. Moreover,
member countries remain unwilling or unable to coordinate economic
policies, and as a result sizable differences in inflation rates and current ac-
count balances will continue to destabilize exchange rates. Periodic
currency realignments will be necessary, with another likely before the end
of the year.
Changes in the dollar's value also create strains within the EMS. Although
present complaints about US economic policy in part stem from the
strength of the dollar, a new round of criticism would ensue should the dol-
lar weaken appreciably. If internal pressures on the EMS become too great
in the future and result in one or more countries dropping out of the
system, West European leaders undoubtedly will place some of the blame
on the United States. West German Chancellor Schmidt, French President
Mitterrand, Italian Prime Minister Spadolini, and others have pointed to
high US interest rates as a source of strain on the EMS.
To a limited extent, the EMS has influenced domestic economic policies,
and as a result EMS currencies may have been kept from diverging as rap-
idly as they otherwise would have. The dramatic shift in French economic
policy that came on the heels of the EMS realignment in June was in large
part triggered by the government's desire to remain in a West European
currency system, even at the expense of domestic economic and political
goals.
Despite recurring rumors that the French are going to pull out of the EMS,
we believe that the system will continue to hold together. The willingness of
the French and Italians to take austerity measures to defend their
Confidential
EUR 82-10096
October 1982
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Confidentea
currencies augurs well for the survival of the system, although occasional
parity realignments no doubt will still be needed. Prospects for moving
forward to the next evolutionary phase of the EMS-creation of a
supranational monetary authority-are dim. Member countries, particu-
larly West Germany, remain reluctant to hand over any responsibility for
monetary policy to an EC institution.
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Confidential
European Community:
Searchin for Exchange Rate
Stability
Steps Toward Monetary Union
Postwar plans to integrate the West European econo-
mies into a single unit have always implicitly reflected
a need for a common West European currency, or at
least a system of relatively fixed exchange rates.
Operation of the European Community's 10-nation
common market has been hampered and, in some
cases, perverted by exchange rate fluctuations
The Common Agricultural Policy (CAP) stands out as
the most obvious victim of unstable exchange rates
within the Community. Although the CAP includes a
centralized system of farm price supports, currency
fluctuations bring about differences in prices from
country to country in violation of the fundamental
CAP principle of common pricing. Moreover, un-
stable exchange rates severely complicate internal EC
agricultural trade. To offset the effects of changing
exchange rates, the Community has rigged a cumber-
some system of taxes and subsidies on intra-EC trade
in farm products
claim that an exchange rate system is needed first to
encourage governments to adopt similar economic
The desire to move toward greater exchange rate
stability came to the fore in the late 1960s. At the
Hague summit in December 1969, the six countries
that were EC members at the time agreed to start 2
work on the next step of economic integration, "eco-
nomic and monetary union"-a concept that has been
generally interpreted to mean the establishment of a
supranational body to formulate EC-wide economic
and monetary policies. In particular, monetary union
was to be achieved by gradually narrowing the day-to-
day fluctuations in the exchange rates between mem-
bers' currencies. Once the exchange rates could be
maintained at fixed values, creation of a common
EC currency-initially slated for 1980-would be
"merely technical," and an EC monetary authority
would be established. By April 1971, the six EC
countries had worked out the details for tightening the 2
band of permissible exchange rate fluctuation from
the ? 1 percent allowed under the Bretton Woods
system' to ?0.75 percent beginning on 15 June 1971.
The lack of fixed exchange rates also may have
impaired industrial development in the Community,
even though currency variations have helped to offset
inflation differentials. In any case, many West Euro-
pean economic observers hold that stable EC ex-
change rates would remove some risk and uncertainty
from intra-EC economic transactions and thereby
increase economic efficiency and growth. Because a
change in exchange rates can alter the cost of produc-
ing in one country compared with another, knowing
that exchange rates will remain fixed would remove a
major uncertainty affecting investment decisions.
Before the Community could implement its plan, the
fixed-rate Bretton Woods system began to break
apart as the dollar came under increasing downward
pressure during the spring of 1971. Unwilling to
support the dollar indefinitely, the West Germans in
May-followed by the Italians and the Benelux coun-
tries-floated their currency against the dollar; the
French tried to maintain the parity of the franc 2
against the dollar through capital controls. Although
fixed dollar exchange rates were reestablished during
71
Although the West Europeans have generally agreed
that stable exchange rates are desirable, the method
of achieving that stability has generated considerable
controversy within the Community. The West Ger-
mans and the Dutch usually have argued that ex-
change rates will stabilize when economic policies and
performance in EC countries are roughly similar. On
the other hand, the French, Italians, and Belgians
' Under the system worked out at a 1944 conference at Bretton
Woods, New Hampshire, members of the International Monetary
Fund (IMF) pegged their currencies to the US dollar, which was
convertible into gold at $35 a troy ounce. IMF members were
required to intervene in the foreign exchange markets whenever
their currencies deviated by more than
values against the dollar.
2
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the summer, renewed pressure against the dollar in
August led President Nixon to suspend convertibility
of the dollar into gold, thus effectively abolishin the
Bretton Woods system.
The Smithsonian agreement of December 1971,
which established a ? 2.25-percent band of fluctua-
tion of all currencies against the US dollar, provided
Currency Realignments in the
European Monetary System
the basis for renewed movement toward EC monetary 24 September 1979
union. Under that agreement, EC currencies could
fluctuate against each other by as much as 4.5 percent
if one currency was at the top of the US dollar band
and another was at the bottom. In the spring of 1972,
the EC Council of Ministers agreed to restrict intra-
EC exchange rate fluctuations to one-half the amount
allowed under the Smithsonian agreement. The Com-
munity began this joint float against the dollar,
dubbed by journalists "the snake in the tunnel," on
24 April 1972; the Benelux countries restricted fluctu-
ations between the Dutch guilder and the Belgian-
Luxembourg franc to ? 1 percent, creating "the
worm in the snake." Within a month the United
Kingdom, Ireland, Denmark, Norway, and Sweden
joined the snake.
The snake, however, quickly became a deutsche mark
currency zone as it was abandoned by the United
Kingdom and Ireland (on 23 June 1972), Italy (on
13 February 1973), and France (on 19 January 1974).
The French rejoined the snake in July 1975 but left
again after eight months. Only the countries that were
most dependent economically on West Germany were
willing to adjust their domestic policies sufficiently to
maintain relatively fixed exchange rates a ainst the
deutsche mark.
At the April 1978 EC summit in Copenhagen, West
German Chancellor Helmut Schmidt and French
President Valery Giscard d'Estaing proposed a re-
newed effort to establish what they called a zone of
Operations of the European
Monetary System begin.
The West German mark's cen-
tral rate if revalued upward by
2 percent, while that of the
Danish krone is devalued by
2.9 percent.
The Danish krone's central
rate is devalued by 4.85
percent.
The Italian lira's central rate
is devalued by 6.0 percent.
The central rates of the West
German mark and the Dutch
guilder are revalued upward
by 5.5 percent, while those of
the French franc and the Ital-
ian lira are devalued by 3
percent.
The central rates of the Bel-
gium-Luxembourg franc and
the Danish krone are devalued
by 8.5 percent and 3 percent,
respectively.
The central rates of the West
German mark and the Dutch
guilder are revalued upward
by 4.25 percent, while those of
the French franc and the Ital-
ian lira are devalued by 5.75
percent and 2.75 percent,
respectively.
monetary stability. Schmidt and Giscard stated that
some new initiative to promote economic union was
needed if the Community was to expand beyond a
common market. The two leaders convinced the other
heads of government in Copenhagen that, in addition economic affairs. By December, the details of the new
to the trade, investment, and growth benefits, a system had been worked out, and the EC launched the
European Monetary System (EMS) would lend great- EMS on 13 March 1979.
er weight to the Community's voice in international
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The European Monetary System is basically a joint
float of eight EC currencies;' the United Kingdom
declined to join the float, and Greece, the 10th EC
member, has not yet been incorporated into the
system. The system's prime objective is stabilization
of the value of the members' currencies against one
another. The Community hopes that the existence of
the EMS will prod member countries to coordinate
their economic policies. Economic convergence would
then allow the EC to establish a centralized mone-
tary authority, furthering the goal of eventual eco-
nomic and monetary union.
At the heart of the EMS is the European Currency
Unit (ECU), an accounting unit made up of a basket
of nine EC currencies' (see table below). In exchange
for 25 billion ECUs, the central banks of the EMS
countries alloted 20 percent of their foreign exchange
and gold reserves to the European Monetary Cooper-
ation Fund (FECOM). The Fund primarily acts as a
clearinghouse for swap transactions between mem-
' Belgium and Luxembourg maintain a monetary union, with both
currencies equal in value; thus, the Luxembourg franc does not
float separately.
' The ECU is defined as made up of 0.828 West German deutsche
mark, 1.15 French francs, 0.0885 British pound, 0.286 Dutch
guilder, 109 Italian lire, 3.66 Belgian francs, 0.217 Danish krone,
0.00759 Irish pound, and 0.14 Luxembourg franc.
bers' central banks. The FECOM also manages
short-term loans of reserves to the member countries.
The EMS joint float is a 'parity grid" arrangement
that includes a "divergence indicator" to signal po-
tential problems. The grid is set up so that each
currency may deviate from its parities against any
other currency by no more than 2.25 percent (6
percent for the Italian lira). The divergence indicator,
on the other hand, is calculated as a deviation from
each currency's central rate against the ECU.3 If a
currency's exchange rate goes past the divergence
indicator, the EMS countries 'presume" that the
country with the diverging currency will take appro-
priate action, such as adjusting its monetary or fiscal
policies. Although action is not required, the govern-
ment must explain to the other EMS countries if it
chooses not to act. Action is required if a currency
reaches its limit on the grid. At that point, the EMS
central banks are expected to intervene in exchange
markets to maintain the integrity of the band. Re-
alignments of the central rates occur when the mem-
ber countries agree that the old parities can no longer
be supported.
'The divergence indicator for each currency equals 0.75 X (the
allowable margin of fluctuation) X [1-the weight of the currency
in the ECU). For the deutsche mark, the indicator is 0.75 X 2.25
X (1-0.33) = 1.13 percent].
West
German
Mark
French
Franc
Dutch
Guilder
Belgian
Franc b
Italian
Lira
Danish
Krone
Irish Pound
ECU
2.334
6.614
2.580
44.97
1,350
8.234
0.691
West German mark
2.773
1.102
19.10
561.5
3.453
0.290
French franc
0.353
0.390
6.799
204.2
1.245
0.105
Dutch guilder
0.905
2.564
17.44
523.4
3.192
0.268
Belgian franc b
0.052
0.147
0.057
30.03
0.183
0.015
Italian lira
0.002
0.005
0.002
0.033
0.006
0.001
Danish krone
0.283
0.803
0.313
5.462
164.0
Irish pound
3.378
9.571
3.733
65.08
1,954
11.92
a After the 14 June 1982 realignment. Columns are expressed in b The parities for the Luxembourg franc are the same as those for the
their respective national currency units. Belgian franc because of the Belgium-Luxembourg monetary union.
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Table 1
Selected Countries:
Consumer Price Inflation
Percent change over
previous period
1978
1979
1980
1981
First-
Half
1982
United States 7.7
11.3
13.5
10.3
7.2
European Monetary System
Belgium
4.5
4.4
6.7
7.6
8.4
Denmark
10.1
9.6
12.3
11.7
10.5
France
9.3
10.6
13.5
13.3
13.9
Ireland
7.6
13.2
18.2
20.4
19.9
Italy
12.4
15.7
21.2
18.7
16.1
Luxembourg
3.1
4.6
6.3
8.1
8.7
4.1
4.2
6.5
6.7
6.7
8.3
13.4
18.0
11.9
10.2
2.7
4.1
5.5
5.9
5.6
Selected Currencies: Change
Against the European Currency Unit
I l l l l l t 1 1 1 l l l I l l l l l l l l l 1 l l l l l l I t l l l I l l l l l l l IIII 111 II I iI Ill
1978 1979 1980 1981 1982
Deutsche
Mark
French
Franc
Italian
Lira
Middling Results
The EMS has had little success so far in achieving
long-term exchange rate stability-its primary goal. 587194 7-82
Since the system began operating, EMS parities have
been realigned six times, mostly because differences
in inflation rates and current account balances among
the member countries have not narrowed (see table 1).
Two of the three realignments in the past year
occurred because French inflation was continuing at
about 13 to 14 percent while price increases in other
EC countries were slowing. Moreover, the inter-
national financial community considered Mitterrand's
economic policies as inflationary and expected these
intra-EC price trends to continue for some time. Even
before the most recent realignment on 14 June, the
lack of long-term stability alarmed Bundesbank Presi-
dent Otto Poehl, who warned in several speeches that
frequent exchange rate changes were threatening the
EMS by eliminating the major reason for its estab-
lishment.
measured against the European Currency Unit (ECU)
has not lessened substantially since establishment of
the system. Based on a calculation of the standard
deviations 2 of the percent changes of the major
currencies against the ECU, only the West German
mark, the Italian lira, and the Irish pound are more
stable than in 1978 (see table 2).
Impact of the Dollar
Shifts in the dollar exchange rate have made stability
harder to achieve for the EMS. Any substantial
change in the value of the US dollar-up or down-
therefore leads to West European criticism of US
economic policies. Carter administration policies
came under sharp attack from West European leaders
for having contributed to the slide in the dollar's
Although a 1981 study by the EC Commission main-
tains that interventions in the foreign exchange
markets under the EMS have reduced day-to-day
fluctuations in exchange rates, an examination of the
evidence casts doubt on even this limited claim. The
average daily fluctuation of most EMS currencies as
z The standard deviation is the amount of variation from an average
within which two-thirds of the observations occur. For example,
two-thirds of the daily percent changes in the value of the Belgian
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Table 2
Selected Countries: Exchange Rate Volatility a
1978
13 March-
23 Sep 1979
24 Sep 1979-
29 Nov 1981
30 Nov 1979-
22 Mar 1981
23 Mar 1981-
4 Oct 1981
5 Oct 1981-
20 Feb 1982
21 Feb 1982-
13 Jun 1982
Belgian franc b
0.123
0.080
0.090
0.199
0.106
0.320
0.075
Danish krone
0.084
0.101
0.075
0.198
0.086
0.078
0.070
French franc
0.138
0.142
0.089
0.053
0.148
0.061
0.232
Irish pound
0.122
0.170
0.063
0.165
0.079
0.077
0.078
Italian lira
0.111
0.067
0.085
0.128
0.182
0.074
0.057
Dutch guilder
0.075
0.073
0.072
0.059
0.107
0.071
0.084
British pound
0.122
0.202
0.339
0.222
0.228
0.174
0.140
West German mark
0.080
0.076
0.040
0.071
0.084
0.064
0.085
US dollar
0.252
0.127
0.100
0.268
0.338
0.253
0.259
Japanese yen
0.246
0.379
0.092
0.304
0.335
0.228
0.122
Swiss franc
0.359
0.119
0.085
0.138
0.233
0.185
0.161
a Standard deviation of the day-to-day percent changes in exchange
rates against the ECU between realignments. Larger numbers
indicate greater volatility.
b Includes the Luxembourg franc.
value. The rise of the dollar since 1980 has brought
more recent US monetary and fiscal policies under
fire
The West German attempt to stabilize the dollar/
deutsche mark exchange rate also has put pressure on
the EMS currencies. Since the dollar began appreciat-
ing in 1980, the Bundesbank has kept interest rates
high to support the deutsche mark. Higher interest
rates strengthened the mark against other EMS cur-
rencies, forcing some of the other EMS countries in
turn to hike their interest rates as they tried to
High US interest rates, on top of sizable US current
account surpluses, have helped the dollar to appreci-
ate nearly 50 percent against the ECU since the start
of 1980 (see figure). Because the share of imports
priced in dollars and the importance of imports in the
economy vary among EMS countries, the domestic
price effects of a change in the dollar differ. Thus, the
Netherlands, where imports priced in US dollars
equal 16 percent of GDP, is more heavily affected
than France, whose dollar-denominated imports equal
only 6.5 percent of GDP. Differences in inflation rates
among the countries, therefore, can be aggravated by
the unequal impact of the dollar appreciation.
Changes in the dollar exchange rate can also lead to
changes in each country's balance of payments
maintain currency parities (see table 3).
Constraints on Policies
Although the EMS has yet to bring about a conver-
gence of economic policies among the participants, the
system undoubtedly has resulted in national policies
that are less divergent than otherwise would be the
case. The French austerity program announced imme-
diately after the recent realignment provides a prime
example. Perhaps even more important, the shift in
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Table 3
Selected Countries:
Real Money Market Rates a
1978
1979
1980
1981
First-
Half
1982
6.08
7.20
Belgium
0.73
3.57
4.52
3.86
3.52
Denmark
5.32
3.03
4.63
3.07
6.10
France
-1.32
-1.56
-1.65
2.00
2.06
Ireland
0.82
0.27
-2.83
-6.86
-6.24
Italy
-0.91
-3.84
-4.03
0.90
4.78
Netherlands
2.14
4.83
3.63
4.31
2.20
United Kingdom
-4.60
0.19
-1.90
1.39
2.92
1.00
2.59
4.04
6.21
4.13
French policy shows the degree to which Paris has
thus far been willing to go to maintain a viable 'West
European currency system.
insurance deficits, freezing wages and most prices,
and slowing money supply growth. Without the
French commitment to the EMS, Mitterrand could
have continued his inflationary policies longer than he
did by either letting the franc slide in value or
applying stringent capital controls
Politically, we believe that Mitterrand would find
withdrawal from the European Monetary System as
embarrassing as Giscard found withdrawal from the
snake, especially if Italy could remain in the system.
The French President probably would come under
severe attack by the opposition for abandoning efforts
to preserve the franc's value. Moreover, the press and
the opposition parties would remind the public of
Mitterrand's past pledges of strong support for EC
institutions. Recently the government announced that
it was raising $4 billion in international capital mar-
the EMS allows Paris to point to external obligations
as a reason for taking unpopular deflationary mea-
sures. Nevertheless, we think that Mitterrand proba-
bly would be willing to take France out of the EMS if
he believed that continued participation was harnfin
long-term French interests.
After taking office in the spring of 1981, France's
Socialist government boosted the minimum wage,
increased transfer payments and other government
spending, and accelerated money supply expansion in
an attempt to speed up economic growth. At the same
time, other EMS countries were still following rela-
tively restrictive monetary and fiscal policies.
Although French GNP growth did pick up, the price
was continued high inflation and a larger current
account deficit. The concurrent nationalization pro-
gram encouraged capital to leave France.
As a result, the franc began to weaken against the
other EMS currencies. Since the Socialist victory,
Paris has spent more than $8 billion in reserves
supporting the franc. When the EMS realignment
and the austerity program were announced in June of
this year, Banque de France had only a one-month
foreign reserve cushion. The new French economic
program is designed chiefly to cut the 14-percent
inflation rate by reducing the budget and social
The influence of the EMS on other EC countries'
policies has been more subtle. The smaller countries
have long adopted economic policies aimed at main-
taining stable exchange rates with their major eco-
nomic partners. Thus, the Dutch and the Danes tend
to follow economic policies compatible with those of
the West Germans, while the Belgians and the Lux-
embourgers attempt to maintain a balance between
the West Germans and the French. For their part, the
Italians have made only minor policy adjustments in
response to developments in other EMS countries.
Although the Italian austerity program announced on
31 July may in part be a consequence of Italy's
participation in the EMS, Rome claims that the
primary purpose of the new measures is to bring down
a sizable government budget deficit to slow inflation.
Bonn has made few, if any, policy adjustments be-
cause of its EMS membership. With its relatively low
inflation rate and usual current account surplus, West
25X
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Germany normally has had the strongest currency in
the EMS. As a result, the government in Bonn, and
even more so the Bundesbank in Frankfurt, believe
that other EMS members should adopt policies emu-
lating the West German example. As the Bundesbank
stated in its 1981 Annual Report, the EMS countries
"will have to make even greater efforts to achieve
more economic harmony on the basis of the highest
possible degree of price stability"; West Germany has
had the lowest inflation rate of any EC county each
year since the EMS was established.
Prospects
Although we believe the EMS will hold together,
continued realignments will be necessary, and another
one is likely before the end of the year. The French
and Italian austerity programs and the June realign-
ment will not be sufficient to stabilize exchange rates
over the next few years. The fall of the Spadolini
government in early August has delayed timely imple-
mentation of some austerity measures. Econometric
simulations using CIA's Linked Policy Impact Model
suggest that the realignment and the new French and
Italian austerity programs, if implemented as an-
nounced, will not be sufficient to stabilize EMS
currencies through 1983:
? In France, the current account would improve by
$1.2 billion in 1982 and by $3.4 billion in 1983, and
the GNP growth would be shaved about 1 percent-
age point this year and next; inflation would barely
be affected, however, remaining above 12 percent
through 1983 if wage-price controls are not contin-
ued-Paris maintains that these restrictions are
only temporary.
? The Italian current account would improve by
about $1 billion in 1982 and $2 billion next year.
The Italian austerity program would almost elimi-
nate GNP growth this year but would have only a
slight effect on growth in 1983. By shaving demand
through higher taxes and lower government spend-
ing, Rome would trim inflation by about 0.4 per-
centage point in 1982. There would be hardly any
change in 1983 from what would have occurred
without the program.
? West Germany would remain little affected by the
EMS realignment and the French and Italian aus-
terity programs. Because the decline in import
prices for goods from France and Italy would offset
the drop in export volume to France and Italy, the
substantial current account surplus would not sig-
nificantly change this year. In 1983, when the
lagged effects in the other countries would have
taken hold, the current account surplus would fall
by only $700 million. Inflation is expected to remain
at roughly 4 percent through 1983.
The difference in inflation rates between France
and Italy on one side and West Germany on the
other is likelyltiLulmain out 10 percentage points
through 19831 The growing West 2
German current account surplus and a continuing
French deficit will compound the difficulty of main-
taining the present EMS parities.
Movement toward the next evolutionary phase of the
EMS, creation of a European Monetary Fund (EMF)
that would have supranational monetary authority,
appears likely to remain blocked for the near future.
When Chancellor Schmidt and President Giscard
originally broached the idea of the EMS, they called
for the EMF to start operations by 1981. The EMS
members are little closer to this objective today than
four years ago. In the spring of 1982, EC finance
ministers refused to agree on minor procedural adjust-
ment; to EMS policy coordination because economic
conditions were so divergent that more than pro-
cedural changes were needed to improve the system's
overall performance. The ministers met again in
August to consider expanding the scope of the EMS
by giving the European Monetary Cooperation Fund
responsibility for intervening against third-country
currencies, but no progress was made. In a recent
interview in Sparkasse magazine, West German Fi-
nance Minister Manfred Lahnstein ruled out any
institutional change in the EMS until the member
countries cooperate to develop more complementary
economic policies.
Expanding the role of the ECU, such as making it
available for use as an international reserve currency
and for private transactions, also is unlikely in the
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near future. Converting the ECU from simply an
accounting unit into an actual international currency
would require the creation of an issuing authorit
such as the EMF.
The EMS will continue to serve as a rallying point for
West European criticism of US economic policy.
Until EMS members are better able to coordinate
their own economic policies, changes in the value of
the dollar will destabilize the EMS. Although today's
complaints against the United States focus on the
strength of the dollar, a new round of criticism will
ensue should the dollar weaken. If internal pressures
on the EMS become too great and lead to one or more
countries pulling out of the system, West European
leaders undoubtedly will place some of the blame for
the system's demise on the United States. In any
event, continuing policy conflicts between the United
States and EMS members over exchange rates are
likely to remain a sore point in the US-EC relation-
ship for some time to come.
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Confidential
Confidential
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