EXCHANGE-RATE STABILITY AND MARKET EXPECTATIONS - THE CRISIS OF THE EMS

The stability that bad prevailed in the European Monetary System after the liberalization of capital and foreign exchange movements ended in the second half of 1992 following the negative outcome of the Danish referendum to ratify the Maastricht Treaty. The markets considered as likely a realignment which the interventions of the authorities were ultimately unable to prevent. The realignment took the form of a crisis, with currencies withdrawing from the exchange rate agreement and others having to devalue one or more times. The events revealed a glaring incompatibility between markets' expectations and authorities' interventions. To understand the crisis of the EMS and bear its lessons in mind for the future, it is necessary to identify which ''fundamentals'' determine markets' expectations and why the effectiveness of authorities' interventions was limited.