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Date Submitted: 10/11/2016 07:44 AM
Team work : France : Part 2 : 1980-1999
1. ERM
The European Exchange Rate Mechanism (ERM) is founded in 1979, as part of the European Monetary System. Its purpose is to install monetary stability in Europe by attaining fixed exchange rate, which promotes the trade between countries. Germany became quickly a leading country in the ERM agreement, and this is why from 1980 onwards, all the members had to uniterally peg their currency to the Deutsch-Mark. As we can see on Graph 1, France was also pegged to the German currency, and this explains the strong correlation between the two exchange rate patterns.
In 1980, we can see a large appreciation of the French Franc which is caused by an increase
After the fall of the Communism in the early 1990’s, Germany enters the so-called reunification period, where the government increases its spending drastically, in order to boost the economy. Following the macroeconomics theory, the increase in expenditures will increase the interest rate, depreciate the currency, and bring new investors to the country.
Since France was pegged to the German Mark, they also had to increase their interest rate in order to keep their exchange rate fixed. However, France and most of the other ERM partners did not have the same needs as Germany in that period. Indeed, by staying pegged to the D-M, they suffered an exchange rate crisis called the ERM crisis.
2. Evolution of the Trade balance/CA
1980 real depreciation due to the ERM creation
In the end of the 1970’s, France’s international competitiveness decreased, which was reflected by an equal decrease in investment from abroad. This is why on Graph 2 the trade and current account are in deficit during that period. However, the foundation of the ERM permitted France’s exports to rise again, leading to a cleat boost to the French economy. This
Since France had to reach a fixed exchange rate , they had to strengthen the trade balance cost and price restraints which...