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If instead of the usual exchange-rate-mechanism "snakes" or "bands" each country had a commitment to not allow its currency to appreciate more than x% with respect to any of the other ones, then you would have a system essentially invulnerable to Soros attacks. You can make x% as narrow as you like, though considering FX volatility is about 1% per day, anything narrower than 2 to 3% would require too frequent intervention by the central bank as a market maker (usually seller) in its own currency. Then you can add Jake's idea that the central bank could also be a market maker in currency swaps to help their domestic banks hedge the FX exposure of the domestic import/export sector.

And then you can have actual employment-oriented economic policies in each member state instead of a race to the bottom and games of chicken (always won by the central bank with the undervalued currency) when exchange rates get close to the edge of the "snake".

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Thu Aug 30th, 2012 at 08:46:06 AM EST
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