The European Monetary System followed the «snake» as the system of monetary policy coordination within the EEC. Just as losses on foreign exchange transactions under forward Snake would be considered undesirable, gains on foreign exchange transactions would be welcome. To make such profits, a higher interest rate would be needed in the weak country than in the strong country — a desirable situation to maintain fixed exchange rates. To the extent that, due to a risk of presumed default on futures, there was an intrinsic discount (premium) on the weak (strong) currency, avoiding losses and reaping profits would require an even higher interest rate in the weak country than the strong country. If parity changes were made under the queue, weak and strong countries would likely suffer heavy losses on stock market transactions.12 As a result, parity changes would resist. Such opposition would constitute an additional incentive for the harmonisation of economic policies. Countries would be less vulnerable to thinking that they could, if necessary, resort to future exchange rate developments to reflect a currently divergent economic policy. Changes in parity do not promote the achievement or maintenance of a uniform rate of inflation. A country with high inflation should find it more difficult to contain its inflation rate after a devaluation; Inflationary expectations are expected to be deteriorated by a devaluation. Although a devaluation reduces the supply of real money holdings, such a reduction could be achieved by appropriate monetary policy without devaluation.
For countries trying to move towards a monetary union, exchange rate adjustment should not be seen as a political alternative. The maximum margin between the strongest and weakest currencies of the COMMUNITY fell sharply at the beginning of March 1972, when the agreement between Finance Ministers was announced to reduce intra-European margins. Pending official action, in the days following the finance ministers` meeting, market participants quickly offered the weakest single currency — the Italian lira, which was previously listed at around 3.20% among the strongest Community currencies, the Belgian franc and the Dutch guilder — within the planned range. The maximum margin agreed between the European currencies had therefore been established before the formal application of the system on 24 April 1972. (1) Under the current snake, the need to protect reserves encourages the weak country to reduce its rate of expansion of national credit. However, there is no incentive for the strong country to increase its rate of expansion of national credit. On the contrary, the strong country could respond by further reducing its rate of expansion of national credit in order to sterilize the effects of the inflow of reserves. On the other hand, both countries would be incentivized to adapt under the queue. As long as the interest rates of both countries remain out of control, both countries will suffer losses on foreign exchange transactions. To avoid such losses, the weak country would be encouraged to reduce its rate of domestic credit expansion, while the strong country would be encouraged to increase its rate of domestic credit expansion.10 roduktion and transport delays before delivery and the credit period after delivery). Compared to the dot snake, the forward snake would generally reduce the currency risk associated with each of these two delays.
First, exchange rate stability would reduce the risk of exchange rate changes during the research and trading period, thereby reducing the risk of plans being developed on the basis of erroneous price signals. . . .