Snake in the tunnel
Encyclopedia
The snake in the tunnel was the first attempt at European monetary cooperation in the 1970s, aiming at limiting fluctuations between different European currencies. It was an attempt at creating a single currency band
for the European Economic Community
(EEC), essentially pegging
all the EEC currencies to one another.
Pierre Werner presented a report on economic and monetary union
to the EEC on 8 October 1970. The first of three recommended steps involved the coordination of economic policies and a reduction in fluctuations between European currencies.
With the failure of the Bretton Woods system
with the Nixon shock
in 1971, the Smithsonian agreement
set bands of ±2.25% for currencies to move relative to their central rate against the US dollar. This provided a tunnel in which European currencies to trade. However, it implied much larger bands in which they could move against each other: for example if currency A started at the bottom of its band it could appreciate by 4.5% against the dollar, while if currency B started at the top of its band it could depreciate by 4.5% against the dollar; if both happened simultaneously then currency A would appreciate by 9% against currency B. This was seen as excessive, and the Basle agreement in 1972 between the six existing EEC
members and three about to join established a snake in the tunnel with bilateral margins between their currencies limited to 2.25%, implying a maximum change between any two currencies of 4.5%, and with all the currencies tending to move together against the dollar. This agreement also led to the formal end of the Sterling Area
.
The tunnel collapsed in 1973 when the US dollar floated freely. The snake proved unsustainable, with several currencies leaving and in some cases rejoining. By 1977, it had become a Deutsche Mark zone with just the Belgian and Luxembourg franc, the Dutch guilder and the Danish krone
tracking it. The Werner plan was abandoned.
The European Monetary System
followed the "snake" as a system for monetary coordination in the EEC.
Currency band
The currency band is a system of exchange rates by which a floating currency is backed by hard money.A country selects a range, or "band", of values at which to set their currency, and returns to a fixed exchange rate if the value of their currency shifts outside this band. This allows for some...
for the European Economic Community
European Economic Community
The European Economic Community The European Economic Community (EEC) The European Economic Community (EEC) (also known as the Common Market in the English-speaking world, renamed the European Community (EC) in 1993The information in this article primarily covers the EEC's time as an independent...
(EEC), essentially pegging
Fixed exchange rate
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.A fixed exchange rate is usually used to...
all the EEC currencies to one another.
Pierre Werner presented a report on economic and monetary union
Economic and Monetary Union of the European Union
The Economic and Monetary Union is an umbrella term for the group of policies aimed at converging the economies of members of the European Union in three stages so as to allow them to adopt a single currency, the euro. As such, it is largely synonymous with the eurozone.All member states of the...
to the EEC on 8 October 1970. The first of three recommended steps involved the coordination of economic policies and a reduction in fluctuations between European currencies.
With the failure of the Bretton Woods system
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
with the Nixon shock
Nixon Shock
The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1971 including unilaterally cancelling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.-Background:By...
in 1971, the Smithsonian agreement
Smithsonian Agreement
The Smithsonian Agreement was a December 1971 agreement that ended the fixed exchange rates established at the Bretton Woods Conference of 1944.-History:...
set bands of ±2.25% for currencies to move relative to their central rate against the US dollar. This provided a tunnel in which European currencies to trade. However, it implied much larger bands in which they could move against each other: for example if currency A started at the bottom of its band it could appreciate by 4.5% against the dollar, while if currency B started at the top of its band it could depreciate by 4.5% against the dollar; if both happened simultaneously then currency A would appreciate by 9% against currency B. This was seen as excessive, and the Basle agreement in 1972 between the six existing EEC
EEC
EEC is an abbreviation that usually refers to the European Economic Community, the forerunner to the European Union.It may also refer to;* The East Erie Commercial Railroad, a shortline in Pennsylvania...
members and three about to join established a snake in the tunnel with bilateral margins between their currencies limited to 2.25%, implying a maximum change between any two currencies of 4.5%, and with all the currencies tending to move together against the dollar. This agreement also led to the formal end of the Sterling Area
Sterling Area
The sterling area came into existence at the outbreak of World War II. It was a wartime emergency measure which involved cooperation in exchange control matters between a group of countries, which at the time were mostly dominions and colonies of the British Empire...
.
The tunnel collapsed in 1973 when the US dollar floated freely. The snake proved unsustainable, with several currencies leaving and in some cases rejoining. By 1977, it had become a Deutsche Mark zone with just the Belgian and Luxembourg franc, the Dutch guilder and the Danish krone
Danish krone
The krone is the official currency of the Kingdom of Denmark consisting of Denmark, the Faroe Islands and Greenland. It is subdivided into 100 øre...
tracking it. The Werner plan was abandoned.
The European Monetary System
European Monetary System
There are three stages of monetary cooperation in the European Union.-Background:European currency exchange rate stability has been one of the most important objectives of European policy makers at least since the Second World War....
followed the "snake" as a system for monetary coordination in the EEC.