The Son of Finance of the Great Age

  Chapter 85 The European Monetary System

  Exchange rate refers to the rate at which one country's currency is exchanged for another country's currency. Although gold and silver are regarded as a symbol of value all over the world, due to their storage capacity and circulation problems, they are no longer suitable as tools for modern world transactions. In this case, gold and silver guaranteed by national credit Paper money appeared.

  Paper currency itself is not as valuable as gold and silver. It is a currency symbol guaranteed by the state government through coercive means and guaranteed by national credit. In the beginning, banknotes could still be exchanged with gold and silver. Later, as more and more banknotes were issued, the exchange between banknotes and gold and silver was decoupled.

   Various countries began to issue currency, and the right to issue this currency must also be in the hands of the government, because the essence of this behavior is to create wealth, and there is a special name in the economy called "seigniorage". The central bank is responsible for issuing currency. Although the money is included in the liability part of the balance sheet, in fact, inflation is caused by the increase in the amount of money, and some wealth in the society is collected by the government in a disguised form because of the price increase. middle.

  Although the issuance of currency is beneficial, it cannot be issued indiscriminately, otherwise it will cause hyperinflation, which is enough to collapse a country overnight.

  With currency, conflicts in international trade arise. After all, it is impossible for a country's currency to circulate in another country, otherwise the "seigniorage" will fall into the hands of other governments, which is absolutely intolerable. In this case, the exchange rate system came into being.

Before the "Bretton Woods System", there was no fixed currency as a settlement currency in international trade. Later, under the negotiations and games of various victorious countries in World War II, the U.S. dollar became the designated settlement currency in international trade because it was linked to gold. Its strength has also been established since then.

  After the 1970s, the Bretton Woods system went bankrupt, and the economic community established by European countries began to discuss the initiative to establish a European currency system, seeking to establish a new currency system other than the US dollar, which was the predecessor of the euro.

  By October 1990, the United Kingdom announced to join the European Monetary System, bringing the number of member states to ten. The ten countries are France, Germany, Italy, Belgium, Denmark, Ireland, Luxembourg, the Netherlands, Spain and the United Kingdom. The combined GDP of several countries can basically represent the economy of Europe.

The emergence of the European Monetary System has led to the formation of a loose monetary union among several major European countries, whose main content is a basket of currencies (called the European Currency Unit ECU) composed of member states of the European Community. In the center, the currencies of the member states are linked to it, and then through the European Currency Unit, the currencies of the member states determine the bilateral fixed exchange rate.

  This exchange rate is not completely fixed. The currency exchange rate among the member states has a fluctuating range, which is plus or minus 2.25%. The British pound is set at 6% because of the large proportion of the UK’s GDP.

  In order to maintain this exchange rate system, member states need to transfer both gold and U.S. dollar reserves to the European Monetary Cooperation Fund in exchange for a corresponding number of European currency units. If the central bank of a member country needs to intervene in the exchange rate of its own currency, it can use the European currency unit or other forms of international reserves in its hands to buy its own currency from other countries, thereby intervening in the foreign exchange market.

Since the mark was the strongest currency in the European currency market at that time, and it was also one of the major trading currencies second only to the U.S. dollar in the international foreign exchange market, the market generally believed that the relationship between the currency of a member state of the European Monetary System and the mark If there are sharp fluctuations, it will be considered that the country's central bank is intervening in the exchange rate.

  According to the regulations, if the exchange rate of the two currencies between the member states exceeds the specified range, then the central banks of the two countries involved are obliged to intervene. But in fact, due to the strong position of the mark, when the fluctuations of many currencies reach the specified range, only that country unilaterally intervenes in the exchange rate market, and Germany does not need to fulfill this obligation.

   This imbalance planted the seeds of a crisis for the interconnected exchange rate system among European currencies.

After entering the 1990s, the world pattern has undergone earth-shaking changes. First, the Berlin Wall collapsed. The East German parliament decided to merge into the Federal Republic of Germany (West Germany), and stopped the work of the East German government in October. Since then, due to the Second World War This ended the division of Germany after the war.

At this time, the Soviet bloc, which was already struggling internally and externally, was unable to stop the dissent of its member states. In the following year or so, the member states of the Soviet Union declared independence one after another, breaking away from the Soviet Union and the Warsaw Pact group. The largest military bloc since then has also disintegrated.

After the reunification of Germany, the backward economy of East Germany seriously dragged down the economy of the Federal Republic of Germany. Due to various reasons such as the large influx of population and the need for the same welfare for the same citizens, plus the fact that the marks of East and West Germany were equal Compared with such an extremely unreasonable exchange rate,

  The German government ran a huge fiscal deficit.

   Within the European Community, due to the uneven economic development of each country, the policy orientation is also different. For example, at that time, the economies of countries such as Britain and Italy had been sluggish, with slow growth and increased unemployment. When monetary policy could not be decided, they urgently implemented low interest rate policies to stimulate the economy.

  In this case, the Deutsche Mark, which occupies an important position in the European Currency Unit, and its government's policies have become an important weather vane.

  International capital that is familiar with the operation of the European monetary system is focusing on this point, and the direction of Germany will determine how they operate in the market.

  The act of attacking the currency of a certain country will appear in the world financial market for the first time, be carried forward in the hands of hedge funds, and even sweep many countries later.

   This will also be the stage where macro strategy hedge funds have completely entered the stage of history, and they will burst out with a radiance that makes people look at them. (In order to thank the recommended votes for more than 7,000, a new chapter will be added today, and thanks to book friends TomUN and Kun Sha for their rewards!)

  (end of this chapter)