A Reform of the European Currency Snake (Réforme du serpent monétaire européen) (Reforma de la serpiente europea de monedas)

Since its inception in April 1972, the European currency snake has been beset on a number of occasions by waves of speculation. Large-scale shortterm capital movements have forced the withdrawals of the United Kingdom, Italy, and France. Speculation has occasionally been seen as disruptive, in the sense that it has not always been seen as being warranted by underlying economic conditions. This paper examines a reform of the snake that would successfully combat disruptive capital flows without the need for controls on capital movements within the European Economic Community (EEC). Under the reform, official support would be switched to the forward market; spot exchange rates would be free; and partner currencies purchased (sold) through forward support operations would, on maturity, be sold (purchased) in the free spot market. Pegged forward exchange rates are found to be advantageous in a number of ways: (1) Unlike spot market speculation, forward market speculation involves no movement of funds; exchange controls to restrain speculation in the officially supported exchange markets would not, therefore, interfere with the free flow of capital within the EEC. (2) During the period before maturity of official forward contracts, both strong and weak countries would be encouraged to bring interest rates into line with those in other member countries in order to avoid losses on exchange transactions--that is, a harmonization of monetary policies would be encouraged. (3) The interests of traders are, in general, better served by stability of forward rather than of spot exchange rates. Free spot exchange rates are found to add still more advantages: (1) Freedom for the authorities to undertake discretionary purchases and sales of partner currencies in the spot market would remove the politically sensitive need for financing and settlements between members. (2) Reserves and money stocks would be unaffected by the whims of transactors in short-term capital. (3) Speculation would be discouraged by the greater risk associated with the stochastic element in the profitability equation of speculators--the expected spot rate. /// Depuis sa création en avril 1972, le serpent monétaire européen a fait l'objet, à plusieurs occasions, d'attaques spéculatives. Des mouvements massifs de capitaux à court terme ont obligé le Royaume-Uni, l'Italie et la France à l'abandonner. On a considéré que cette spéculation avait parfois été perturbatrice, en ce sens qu'elle n'était pas touj