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EMU Keeps Steaming Ahead

Surprise, surprise. The


boys were back at work again this weekend. The Greek


was admitted to the

Exchange Rate Mechanism

(ERM) at a devalued exchange rate (down 14%). Also, the Irish


was revalued upwards by 4%.

The ERM is EMU's system of exchange-rate ceilings and floors. Every ERM currency has a central parity rate against the


(European Currency Unit, a precursor of the euro) and by extension against every other member currency. The drachma will enter the ERM at the central parity rate of 357 drachmas to the ECU.

In the old days, pre-1993, the ERM actually meant something. The majority of ERM currencies were bound together by narrow bands of plus- and minus-2.25%. The entry of the British


to the ERM brought about the most famous episode in currency speculation in modern history when


and a lot of other folks effectively took the other side of the sterling ERM bet (autumn 1992). In the following year, there was the French


crisis (summer 1993), which ended with the ERM bands being widened to plus- and minus-15%. Since then the EMU parity grid has been a paper tiger, but form matters even if substance is lacking. By putting the drachma in the ERM, the ministers are signaling that they want Greece to be taken seriously as a future euro candidate.

In a wider sense, the drachma announcement by the euro mandarins signifies that the whole EMU project is going forward. First, there will be the Jan. 1, 1999, launch of the new federal currency with 11 members. Then the rest of the union is set to fall into place in 2001. Kind of a wake-up call to any countries that are out of the first wave, namely the U.K. and Sweden.

The move is also an EMU handout to Greece to help it get on its way toward meeting the stability pact criteria with the 2001 date in mind. Hey there, neighbor, have a piece of our exports to get you going! More importantly, in some circles Greece will now be regarded as a proper convergence play. Cheaper cost of debt. That's why the ministers wanted to get the devaluation over and done with now. It also puts Greece on the spot. Convergence and EMU membership are now Greece's play to lose. If Athens flubs it now, there will be nobody to blame but itself.

Imagine that -- Greece in a monetary union with Germany! If Italy sent a chill up the average German citizen's spine, imagine what the thought of Greece must do.

A new poll by the


newspaper appeared over the weekend. The majority of German's are still against EMU, but there is some movement that reflects a softening to the opposition. The support for the euro is strongest with the FDP and Green voters. CDU voters are marginally in favor of the euro. The real opposition comes from the SPD voters who are still solidly against the euro (53% against, 35% in favor of), as has been their tradition. The SDP is a party that is on the rise, as was

evidenced by the recent local election that put it back on the map. All of this may explain why the EMU ministers insisted on accelerating the timetable so that the choice of the countries for membership would be done in May, well before the September general elections in Germany.

The move on the Irish punt was well-anticipated. Ireland is a full-fledged member of the European Monetary Union and is going to adopt the euro on Jan. 1, 1999. The revaluation over the weekend was merely a marking of the Exchange Rate Mechanism parity level to market.

New Chief at BoJ

Say hello to

Mr. Masuru Hayami

, who is about to be nominated by

Prime Minister Hashimoto

as the next head of the

Bank of Japan

. Stats: 72-years old. Former BoJ staffer from the period immediately following World War II until 1978. Later headed a major trading firm called

Nissho Iwai

. Fluent in English. Been all over the map on official delegations to just about every country in the world. Author of the

The Day the Yen Wins Respect

(1995) -- whatever that means.

First quote as BoJ president-nominee: "I decided to take the job because I, as someone who knows a little about the BoJ, thought that I may be of some service to the bank now at this difficult time." Sounds like the carefully chosen words of a man who is smart enough to create every appearance that he has no links to the current scandals.

Quote of the Day

"Europe is now ready for the euro."


Dominique Strauss-Kahn

, minister of finance of France, following the admission of Greece to the ERM this weekend.

David DeRosa heads a trading research firm and is an adjunct professor at the Yale School of Management. His column on international finance and trading appears Mondays, Wednesdays and Fridays. He welcomes your feedback at