The Euro

Book By David Marsh

Reviewed By GlobalMacroForex

David Marsh lays out the tale of the Euro’s creation and all of the bumps in the road along the way. From George Soros’ speculation against the pound on Black Wednesday to Italy being forced to leave the Currency Adjustment mechanism, to full integration with the new currency.

Marsh paints a vivid picture by starting off with a historical account of Germany. After World War 1, Germany had a massive amount of debt. To alleviate that debt, the government printed such a massive amount of money that the currency hyper-inflated. This, of course, allowed Hitler to blame Jewish bankers for the country’s ills.

However, Marsh’s focus here is to point out that after World War 2, Germany remained still scared from the hyper-inflation, and placed an extreme importance on Hawkish monetary policy (avoiding printing money). Making it a top priority that the Bundesbank (Germany’s Central Bank) maintain complete independence. Even after Germany joined the Euro, the country still presses on with this strong anti-inflation stance despite the cries from the rest of the Eurozone to print money to aid their debt.

When the countries of the future Eurozone decide to move forward with the Union, they create the concept called “Snake in a Tunnel”. This name comes from its graphical depiction of multiple currencies being managed to remain within a tight trading band….

How a trading band works is that it requires the central bank of each nation to have reserves in other foreign currencies.  When a country’s currency gets too weak that it would fall out of the band, the central bank sells forex reserves to buy its own currency.  When the currency gets too strong, the central bank prints money and buys foreign reserves to drive it back down into the trading band’s limits.  This system was even more restrictive than the original Bretton Woods trading band.

Unfortunately for the Eurozone members, there were numerous problems involved with keeping their currencies in the Snake. In 1989 the Berlin Wall came down and Germany in 1990 underwent reunification combining the east and western countries into one.

Now Germany had to integrate the eastern side’s currency with the iconic western D-Mark. They should have chosen an exchange rate that favored a much stronger western German currency. Instead, the German central bank chose to reunite under a 1:1 parity.

This caused a heavy depreciation in the western D-Marc since they essentially were diluting it’s purchasing power to give it out to eastern Germans at a lower rate. The author of the book doesn’t mention this but I laughed thinking that it’s ironic because they were celebrating the defeat of communism with a forced and failed economic equality.

Now Germany normally had very low inflation, but because of the dumb 1:1 east: west currency parity, they were having heavy CPI increases. So to offset this, the Germans hiked their central bank interest rates. This had negative effects on the other currencies in the Snake.

The United Kingdom was suffering a recession from 1990 to 1992 but had to keep interest rates high to avoid having their currency depreciated against the German D-Mark and out of the band. Sensing that the UK would likely have to break their obligations to the Snake, George Soros’ hedge fund shorted the British pound to profit when they fell out of the Snake mechanism. The UK asked for help from Germany, but the Germans would only loan money to the British central bank, not give. This is again ironic because they just gave 1:1 parity to East Germany but when the United Kingdom asks for help with the Snake Band, they brush it off as currency socialism.

The German Central Banker Helmut Schlesinger made it clear in an interview that he thought the pound should depreciate. After Britain exhausted their foreign exchange reserves and even did huge interest rate hikes, eventually they reluctantly agree to leave the EU Snake and depreciate their currency. The crushing blow to the pound was dubbed “Black Wednesday” and George Soros’ hedge fund made massive gains.

Italy’s currency was also too weak to remain in the band against the German Marc and had to leave the Snake briefly. France had issues but through coordinated action, after the British incident was able to remain.


Overall, David Marsh does a great job at conveying the underlying economic fundamentals that caused these panics while keeping the reader interested in the blow-by-blow political battles that these uncomfortable situations created. Unfortunately, the book was written before most of the events of the modern day Eurozone debt crisis, so I found it more useful for a historical account of the problems with forming the Euro, to begin with.