Managing International Financial Instability
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Managing International Financial Instability

National Tamers versus Global Tigers

Fabrizio Saccomanni

Recurrent instability has characterized the global financial system since the 1980s, eventually leading to the current global financial crisis. This instability and the resultant disruptions – sovereign debt defaults, exchange rate misalignments, financial market illiquidity and asset price bubbles – are linked, in this book, to the shortcomings of the global financial system which tends to generate cycles of boom and bust in credit flows. These cycles are set in motion by the monetary impulses of major industrial countries and are amplified and propagated through the operation of global financial markets. Fabrizio Saccomanni argues that to counter such systemic instability requires that national authorities give adequate weight to financial stability objectives when formulating their monetary and regulatory policies. He maintains that appropriate multilateral strategies to deal with unsustainable trends in credit aggregates and asset prices should be devised in the International Monetary Fund in the context of a strengthened framework to deal with global payments imbalances and exchange rate misalignments.
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Chapter 8: The seven-year war of the French franc (1991-98)

Fabrizio Saccomanni


8. The seven-year war of the French franc (1991–98)* Je donnerai à la France un franc modèle, dont la parité ne changera pas aussi longtemps que je serai là.** Charles de Gaulle (1970, p. 143) A conceited German . . . imagines that he possesses the truth in science – a thing of his own invention but which for him is absolute truth. Leo Tolstoy (War and Peace, p. 757) The EMS crisis of 1992 to 1993 is usually regarded as a prime example of the impossibility of achieving a fixed exchange rate regime in the context of financial globalization and, in particular, of the futility of interventions on the exchange market. It is a generalization that has been widely subscribed to, but one which is not based on a balanced reading of European monetary developments during that time. Analysts have tended to focus on the unsuccessful defence of the parities of the Italian lira and pound sterling and their abandonment of the ERM, without adequately taking account of France’s success in maintaining the parity of its currency unchanged against the German mark over the period that began on 12 January 1987 – the date of the last realignment of the French franc in the EMS – and ended on 1 January 1999 – the date of France’s entry into EMU. Anchoring the franc to the mark with a fixed parity was not a priority objective for France in the EMS, which the French President Valéry Giscard d’Estaing had sponsored together with the German Chancellor...

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