Case study 1: the ERM crises of 1992-3 Put simply, as a precursor to full monetary union (the euro), the economies of the EU undertook a period of exchange rate management in order to create convergence and stability before full conversion to the euro. This took the form of the Exchange Rate Mechanism (ERM). It was a hybrid of fixed and floating exchange rates where currencies were allowed to float against each other but within a …showed first 75 words of 1755 total…

…showed last 75 words of 1755 total…further 10%. There were now 2 pesos to the dollar. This of course means that all foreign debts in dollars have doubled in peso terms. Argentina defaults on its foreign debt, and asks the IMF for help. The IMF agree a loan but on condition of major government spending cuts. Major recession ensues - GDP fell 16%! in 2002, investment down 46%, consumption down 21%. Half the population below poverty line. The devalued peso gradually helps Argentine exporters and recovery begins.