Doubts about European snake strengthened

Press, 31 August 1977, Page 37

Doubts about European snake strengthened

NZPA-Reuter Paris Currency dealers have voiced doubts about the survival of the joint European currency float, after Sweden’s withdrawal, and the devaluation of the Swedish and two other Scandinavian member currencies. The week-end decision to pull the Swedish krona out of the so-called “european snake” underlined the problems its members face in holding their currencies in

line with the West German mark, one of the world’s strongest currencies. “The snake” was originally developed to stabilise European exchange rates in a world of floating exchange rates. Under the system, member currencies maintained fixed parities against each other, but float together against the dollar and other currencies. The weaker members could not manage their balance of payments and inflation problems within the permissable currency fluctuations. Since the float’s inception in 1972, Britain, Ireland, Italy, France, and now Sweden, have decided to pull out, and the group has been reduced to an association of comparatively small countries, in terms of world trade, grouped around the powerful West German mark.

The remaining members of the joint-float are: West

Germany, Norway, Denmark, Holland, Belgium, and Luxemburg. The Swedish krona’s 10 per cent devaluation against other leading currencies, and the five per cent devaluations of the Danish and Norwegian crowns were seen by foreign exchange dealers as inevitable.

The high hopes entertained for “the snake” a few years ago — that it might even be the precursor of European monetary union — have long faded.

When Sweden devalued its currency, and froze prices in an attempt to inject life into its flagging economy, the Prime Minister Thorbjoern Faelldin told a press conference that Swedish companies had been hit by financial crises and bankruptcies in the last year on a scale which had not been known since the 1030 s. ! The devaluation came in the wake of Sweden’s losing foreign reserves to defend■ the exchange rate of the krona.

Sweden’s defection from' the snake forced Norway) and Denmark to devalue) their currencies by five per) cent, but both these countries decided to remain in the joint European float. The krona was devalued against a basket of the 15 most important currencies involved in Sweden’s foreign trade. The 15 countries are West Germany, Holland, Belgium, Denmark, Norway, France, Finland, Austria, Spain, Britain, Switzerland, Italy, Japan, Canada, and the United States, the Swedish central bank said. Mr Faelidin said that he hoped the devaluation would allow Swedish companies to increase their exports by between eight and nine per cent next year. Finland said that it will not take any immediate decision on whether to devalue its currency, but Finnish banks suspended all foreign exchange trading on Monday morning.