EU System 4th November, 2013

Kerem Kilic - 1110207

What is the meaning of ''snake in the tunnel'' ?

The ''snake in the tunnel'' was the attempt of European Monetary Cooperation to limit fluctuations between various European currencies and eventually, create a single currency band for European Economic Community. This was a mechanism for managing fluctuations of their currencies (the snake) inside narrow limits against the dollar (the tunnel).1 The system started in spring 1972 with nine members. After five years, influenced by oil crises, policy dissent and dollar weakness, within two years the snake had lost many of its component parts. Only three members remained in the system and they were Germany, Benelux and Denmark. Even in that time, tunnel limits had to be adjusted a few times because of the strong and increasing value of DEM (Deutsche Mark). The initial and at the beginning kind of hidden idea of ''snake in the tunnel'' system was to create one unique currency that will be able to stand against the dollar. Pierre Werner was the one who presented a report on economic and monetary union to the European Economic Community. The first of three recommended steps was organized around the coordination of economic policies and reduction in fluctuations between European currencies. After collapse of the Bretton Woods system, the bands for currencies to move relative to their central rate against the dollar were 2.25%. That was the tunnel in which European currencies had to trade. However, that ''tunnel'' didn't remain stable and the bands were not applicable for everyone, so many European countries lost their faith and ''took'' their currencies out of the system. The tunnel's biggest collapse happened in 1973, when the US dollar floated freely. Later on it tried to arise again, but its final break down was in 1977. With the Euro, we nowdays are the witnesses of a third ''snake in the tunnel''. Instead of central banks trying to defend their currencies, various entities intervene whenever a Eurozone members sovereign spread breaches an unofficial threshold of around 600 bps against Germany.2 European Union is trying to get all the European members under the same currency, still gaining hopes that it can be strong rival to the US dollar, and by that establish unique economical organization within European borders.
1

European Commission,Economic and Financial Affairs, Phase 2: the European Monetary System, http://ec.europa.eu/economy_finance/euro/emu/road/ems_en.htm, Last accessed: 2.11.2013. 2 T. Martin, Macroeconomics, Europe's Third "Snake in the Tunnel", http://macronomy.blogspot.com/2012/11/ guest-post-europes-third-snake-in-tunnel.html, Last accessed: 2.11.2013.