Abstract

The Deutsche Mark between The Dollar and the European Monetary System

Economic interdependence among Western countries has increased and so has the international transmission of economic disturbances. This in turn has promoted the search for alternative international economic structures that would give countries or a group of countries greater control over their destiny. One such attempt was the creation of the European Monetary System (EMS) which became operable in March 1979. The twin goals of the EMS were to return to the members of the European Economic Community greater economic policy independence from the United States and reduce the perceived disadvantages of the flexible exchange rate arrangement, by creating a “zone of monetary stability”. Neither goal was achieved. A European decoupling from United States monetary policy was not attainable by merely creating a currency bloc. The Deutschemark and Germany’s economic performance are important links in the transmission process of the effects of United States monetary policy upon members of the European Economic Community. It is this link from the U.S. dollar to the EMS via the Deutschemark, which this article investigates. Since this link is stronger at times, weaker at other times, I attempted to answer the question of which conditions are propitious for some European decoupling, say, of interest rate movements from those in the United States, and for greater stability in the EMS