British Monetary Policy and the EU

British Monetary Policy and the EU

The discussion which follows will describe British monetary policy in relationship to the European Union (EU). It will focus specifically on Britain’s experience with the Exchange Rate Mechanism (ERM). The analysis will first present a brief historical overview of British experience with various exchange rate regimes. It will then describe in more detail Britain’s decision to enter ERM and the reasons why it was ultimately forced to withdraw from that mechanism. Finally, some conjectures will be presented on Britain’s future role in the European Monetary Union (EMU).

Since the mid-nineteenth century Britain has experienced almost every type of exchange-rate arrangement. Until 1914 the United Kingdom was on the gold standard. That was suspended (that is the United Kingdom left the standard but with the declared intention of returning) at the outbreak of World War I in 1914. After the war, the United Kingdom implemented a deliberate, discussed, and announced policy of a return to the gold standard at the prewar parity. Monetary policy and foreign exchange intervention were used to this end, and the policy succeeded. The United Kingdom left the gold standard in 1931, however, and the exchange rate floated with varying degrees of intervention until the outbreak of World War II in 1939. The rate was then pegged to the dollar. After the war, the United Kingdom joined the Bretton Woods system. Several sterling devaluations occurred under Bretton Woods, but sterling did not finally float until 1972 (Capie, Wood and Mills, 1986). Again there were varying degrees of intervention but the United Kingdom did not formally peg sterling until it joined ERM in 1990 after shadowing the Deutsche mark in 1988 and 1989. The United Kingdom subsequently left the ERM in 1992 to float once more.

The Exchange Rate Mechanism is part of a plan for European Monetary System (EMS). The EMS was created with the idea that it might restore the stab…

Leave a Reply

Your email address will not be published. Required fields are marked *