A currency crisis is something that is not supposed to happen these days. The very idea evokes images from old newsreels, with grave statesmen in top hats emerging from limousines to urge calm in gravelly voices. But suddenly Europe is up to its eyebrows in one.
And while the immediate impact on most peoples' daily lives will be slight, it could derail the drive to European unity that only a few months ago seemed as inevitable as tomorrow's sunrise.
How could something so important have happened with so little warning? And why are elected officials who have staked their careers on the currency arrangement known as the European Monetary System seemingly powerless to prevent its meltdown?
The answers lie in the basic economics of international finance _ and the even more basic conflicts between domestic and regional political priorities.
Francs are the coin of the realm in France. But when a French company wants to import machinery from a producer in Manchester, England, it must pay the bills in British pounds. And to obtain the pounds, the company must find someone willing to exchange British currency for francs.
The exchange rate is thus the price of pounds in francs, or francs in pounds. And it must roughly reflect the relative purchasing power of the two currencies in their home markets.
If, for example, a drill press costs 1,000 francs in Paris and 200 pounds in London, the exchange rate had better be more or less 5 francs to the pound. Otherwise, both the British and the French will buy all their drills presses on one side of the Channel.
But like life, economics rarely works out so neatly. In the short run, currency exchange rates are influenced by many factors, including the behavior of governments. And since the rates have enormous impact on where goods that can be traded are made and how much they cost, exchange rates are a matter of great interest to the people in charge of national economies.
Most countries (including the United States) allow their currencies to "float" against others. Voluntary transactions between private buyers and sellers determine a currency's value. That suits many politicians, since setting a fixed exchange rate would force them to balance the interests of domestic producers against those of consumers buying goods from abroad.
But European leaders are immensely taken by the idea of maintaining very stable exchange rates within the greater European economy, and for two reasons. First, the system eliminates uncertainty, greasing the wheels of commerce within Europe. A German truck maker can set a price for its trucks in Italian lira, for delivery in six months, because it knows what the exchange rate between marks and lira will be. More important, a fixed exchange system imposes a collective discipline on all the national economies linked to the system. If, for example, Italy allows inflation at home to drive up production costs at its factories, a fixed exchange rate with the mark (and pound and franc) will make Italian products from those factories too expensive to sell abroad.
Indeed, from this perspective, the only other thing better than maintaining fixed exchange rates among European currencies is the adoption of a single currency for the whole European economy. And that is just what European Community leaders proposed to do in the Maastricht agreement on European political and economic union, which they signed last December.
The signatories at Maastricht, visionaries who generally speak of the agreement in political terms, appeared to comprehend that a successful currency union _ or for that matter, a stable fixed exchange rate system _ demanded coordination of virtually all aspects of national economic policy. …