Exchange Rate Regime and Economic Activity in the EU

Since the collapse of the Exchange Rate Mechanism of the European Monetary System in 1992-1993 the monetary setting for trade and investment has changed fundamentally. After six years of stable exchange rates the EU split into a hard-currency block under the "leadership" of the German Bundesbank and the soft-currency countries. Over the period from 1992 to 1995 the real effective exchange rate in Germany, France, the Netherlands, Belgium, Denmark, and Austria rose by an average of 3 percent annually, while the exchange rate in the remaining EU countries fell by 6 percent annually in real terms. At the same time economies whose currencies had lost in value managed to expand real exports 9 percent per year, whereas in hard-currency countries real exports attained a growth rate of only 3 percent. As unit labor costs in the soft-currency countries have not risen faster than in the hard-currency block, the exchange rate fluctuations recorded since 1992 should continue to influence Europe's real economic development in the near future.