- Snake in the tunnel
The "snake in the tunnel" was the first attempt at European monetary cooperation in the 1970s, aiming at limiting fluctuations between different European currencies.
Pierre Wernerpresented a report on economic and monetary union to the European Economic Communityon 8 October 1970. [ [http://ec.europa.eu/economy_finance/euro/origins/werner_en.pdf Werner report in OJEC] ] The first of three recommended steps involved the coordination of economic policies and a reduction in fluctuations between European currencies. [ [http://ec.europa.eu/economy_finance/euro/origins/origins_2_en.htm Origins of the Euro] ]
With the failure of the
Bretton Woods systemwith the Nixon shockin 1971, the Smithsonian agreementset bands of ±2.25% for currencies to move relative to their central rate against the US dollar. This provided a "tunnel" in which European currencies to trade. However, it implied much larger bands in which they could move against each other: for example if currency A started at the bottom of its band it could appreciate by 4.5% against the dollar, while if currency B started at the top of its band it could depreciate by 4.5% against the dollar; if both happened simultaneously then currency A would appreciate by 9% against currency B. This was seen as excessive, and the Basle agreement in 1972 [European currency snake http://www.ena.lu/?doc=10098&lang=02] between the six existing EECmembers and three about to join established a "snake in the tunnel" with bilateral margins between their currencies limited to 2.25%, implying a maximum change between any two currencies of 4.5%, and with all the currencies tending to move together against the dollar. [ [http://www.ucd.ie/economic/staff/rthom/road.ppt The Road to Monetary Union] ] This agreement also led to the formal end of the sterling area.
The "tunnel" collapsed in 1973 when the US dollar floated freely. The "snake" proved unsustainable, with several currencies leaving and in some cases rejoining. By 1977, it had become a
Deutsche Markzone with just the Belgian and Luxembourg franc, the Dutch guilderand the Danish kronetracking it. The Werner plan was abandoned. [ [http://www.europarl.europa.eu/factsheets/5_1_0_en.htm European Parliament: The historical development of monetary integration] ]
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