ABSTRACT

In the last chapter, we presented a brief history of the international monetary system and discussed the Bretton Woods arrangement that launched the modern post-World War II world economy. We now focus our attention on a specific group of countries in Western Europe. We pick up the thread towards the end of the Bretton Woods era and consider the impact of that system on the West European countries. We then describe how, after the collapse of Bretton Woods, these countries undertook various experiments attempting to develop a system that would replace Bretton Woods. In due course, they shaped their own exchange rate mechanism that was not unlike Bretton Woods, but avoided some of its obvious weaknesses. This mechanism had its own flaws and could not withstand shocks in the modern economy: basically a mere exchange rate mechanism was not a viable choice anymore. The options had narrowed to two alternatives: either forgetting about an exchange rate mechanism and floating or adhering to a more integrated system, a monetary union, with its own uncertainties. Eventually, most of Western Europe joined a monetary union, the European Economic and Monetary Union while a few countries, like the U.K., returned to a free float.