Abstract

The divergence indicator is a new instrument in the EMD, the make-up of which is largely identical with its predecessor, the so-called „snake“. The divergence of the ECU daily exchange rate of a currency from the ECU reference rate is related to the maximum possible divergence of a currency. In this way, the varying influence of the different weights of the currencies in the ECU basket is neutralized. The triggering of the indicator gives grounds to assume that the authorities concerned will take appropriate action. The hypothesis that the divergence indicator is intended as an early warning instrument prior to reaching the intervention points is not tenable in the light of the technical make-up and procedure practiced up to now. On the contrary, the function of the divergence indicator is to point out those currencies which, on account of trends diverging from the average, give rise to tensions in the exchange rate structure of the EMS. The consequences of indicator triggering are not governed by rules, but rather depend on the will of the individual country or on the consultations initiated by the divergence indicator. In the very recent past, the causality appears to have been reversed: action is no longer taken when the indicator is triggered, but in order to avoid reaching the divergence threshold. This might have a positive integration effect on the economic policies of the EMS countries.