When Euroland’s Peripheral Members Had Their Own Currencies

June 21, 2011

With the possibility of a break-up of the euro within the next five years, this article reviews how the peripheral currencies performed before joining the European Monetary Union with an eye toward what life after the euro might be like.

Before the euro was created on December 31, 1998, each member had its own currency.  These currencies floated against the dollar.  Valuation adjustments against one another occurred more stochastically than against the dollar.  Instead of responding each day to free market forces, many intra-European currency movements were managed closely by policymakers through intervention in the market, that is the direct buying and selling of currencies, as well as by coordinating interest rate policies and using various foreign exchange and capital controls to stymie speculation.  Germany’s mark was the perennial gold medalist among currencies in the Common Market or European Union as it later came to be known.  The Bundesbank, Germany’s central bank, effectively set the monetary policies of many nations in the region.

Coming out of World War 2, the dollar also had fixed parities against other currencies and versus gold.  Chronic balance of payments disparities made that so-called Bretton Woods system unsustainable by the late 1960s.  Almost 40 years ago on August 15, 1971, former President Nixon suspended dollar convertibility against gold, and several months followed when the U.S. currency was given flexibility to find a better equilibrium.  Under the watchful eye of the IMF, an agreement was signed at the Smithsonian Institution in Washington on December 18, 1971 that locked the dollar into a new set of parities that embodied a devaluation of varying sizes.  Gold was revalued 8.57% to $38 from $35.  The Smithsonian central parity against the mark was set at 3.2225 per dollar. 

The new arrangement didn’t last long.  A second devaluation followed on February 12, 1973, and that was followed on March 19 by the abandonment of any policy pretense to confine the dollar within prescribed boundaries.  While March 1973 dates the time when an international monetary system anchored on fixed prices for gold and the dollar was replaced by a floating exchange rate system, the formality of the Smithsonian Agreement makes that a preferable  base date to use for gauging the performance of the main peripheral members of the European Monetary Union before they traded away independent monetary policies for a shared currency. The mark cross-rates that were embodied in the Smithsonian Accord were 9.3095 Greek Drachma, 20.01 Spanish pesetas, 8.4562 Portuguese escudos, 0.1191 Irish punts (which at the time were tied to sterling), and 180.45 Italian lire.  The table below compares these crosses to those at end-1998, giving cumulative percentage declines against the mark and annualized rates of change over the intervening 27 years between December 1971 and December 1998.

DEM Crosses Italy Portugal Greece Ireland Spain
12/18/71 180.45 8.46 9.31 0.119 20.01
12/31/98 990.00 102.51 100.66 0.403 85.07
Change -81.8% -91.8% -90.8% -70.4% -76.5%
% per year -6.1% -8.8% -8.4% -4.4% -5.2%


The peripheral currencies fell on balance against the dollar as well as versus the mark.  Germany’s currency advanced against the dollar from a central parity of 3.2225 per USD in the Smithsonian Agreement to 1.6690 at the close of 1998.  That movement constitute a 93.1% appreciation, or 2.5% per annum.  The peripherals fell more rapidly against the mark than the DEM’s rate of climb against the dollar.  The mismatched historical performances of the euro’s members had generated misgivings about whether the region had the right stuff to become a sustainable currency union.  Not surprisingly, the hybrid euro has not performed as well against the dollar as the mark had done previously.  Over the ensuing 12-1/2 years since the creation of the euro, however, such has gained 22.9% on balance versus the dollar, a per annum pace of 1.67%.  That’s two-thirds as rapid as the mark’s old pace, indicating that the euro has acquired more of the mark’s good karma than the bad karma of its peripheral members.  If the mark or one the euro’s peripheral members were to break away from the pack, considerable pent-up pressure could come into play, lifting the German unit and/or depressing the peripherals against the dollar.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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One Response to “When Euroland’s Peripheral Members Had Their Own Currencies”

  1. Herdee says:

    I tok my ositions off today on the EUR/USD,here’s why.
    An overlooked item of great importance is the recent visit of top level Chinese Officials to meet with European leaders.People say so what!
    Well it just happens that the Chinese are sitting on a very huge sum of foreign reserves.You say billions,try trillions.
    They have also expressed the attitude of their belief to deversify out of mostly U.S. Dollars.They have also mentioned their political belief in what they say is “triangularization”.
    That means China and the far east,the European Union and America.
    It’s my opinion that the Chinese see this as an opportunity to establish themselves as a “world banker”,since they will be the world’s biggest economy by 2014-15.
    The present debt situation in Europe with rising interest rates there will attract the necessary billion necessary to relieve the debt.
    The trade off will be more openness towards China in the EuroZone.
    As well,they see this as another chance to use their foreign policy to their advantage.Don’t forget that it is totally different than American philosophy of present.
    In Africa they build huge ports,roads,schools and health care systems.They will do the same in Europe.
    By the way,who did they learn that from who no longer does that any longer because they’re broke?