Background
The “snake in the tunnel” concept emerged in the early 1970s as a strategy for maintaining stability among European currencies. During this period, global exchange rate turbulence necessitated measures to manage currency fluctuations tightly.
Historical Context
Prior to the establishment of the European Monetary System (EMS) in 1979, European nations faced significant challenges in maintaining currency stability within a broader context of global exchange rate fluctuation. The “snake in the tunnel” was a precursor arrangement aimed at providing a controlled environment for inter-European currency stability after the collapse of the Bretton Woods system.
Definitions and Concepts
The “snake in the tunnel” refers to a two-tiered mechanism for exchange rate stabilization among a set of European currencies:
- Tunnel: Represents the general accepted margin of fluctuations in exchange rates beyond which intervention is necessary.
- Snake: Represents a narrower band within which the designated group of currencies aims to operate. This band lies within the broader tunnel and requires closer cooperation among member countries.
Major Analytical Frameworks
Classical Economics
Classical economics primarily focuses on long-run adjustments in the economy. The focused intervention mechanism in the “snake in the tunnel” would be seen as temporary and outside the natural adjustment processes.
Neoclassical Economics
Neoclassical thought emphasizes market mechanisms for determining exchange rates. The “snake in the tunnel” represents a managed approach that departs from pure market forces to ensure currency stability.
Keynesian Economics
From a Keynesian perspective, active government intervention is essential for economic stability. The conceptualization of the “snake in the tunnel” aligns with Keynesian advocacy for intervention to mitigate economic volatility.
Marxian Economics
Marxian critique might focus on the role such arrangements play within a capitalist framework, emphasizing how currency stability engagements serve the interests of dominant capitalist economies.
Institutional Economics
Institutional economists might examine the “snake in the tunnel” framework in terms of the formal mechanisms and informal conventions that govern international currency agreements.
Behavioral Economics
Behavioral economic analysis could explore how the structured frameworks of currency stability influence the behavior of market participants, including expectations and speculative actions.
Post-Keynesian Economics
Post-Keynesians might support the “snake in the tunnel” as a necessary measure for managing economic instability and promoting collective governance within the financial system.
Austrian Economics
Austrian economics tends to favor less government intervention and might critique the “snake in the tunnel” as an overreach that distorts natural market signals.
Development Economics
Development economists might examine how stable currency arrangements affect developmental outcomes, particularly in promoting stable trade environments for developing economies.
Monetarism
Monetarists, who emphasize the role of monetary policy, may view the “snake in the tunnel” critically, arguing that rather than stabilizing currencies through coordinated interventions, focus should remain on controlling money supply principles.
Comparative Analysis
In comparison to other exchange rate systems, such as a free float, the “snake in the tunnel” requires significant coordination among participant countries to manage country-specific and cooperative economic policies. This type of strategic intervention can significantly reduce exchange rate volatility but does present its own challenges regarding sovereignty and policy alignment among participating nations.
Case Studies
- Europe (1972-1979): Analysis of the pragmatic challenges while operating within the “snake in the tunnel” system before transitioning to the European Monetary System.
- Scandinavian Currency Union (1875-1914): A historical analogue with a different mechanism but a similar goal of regional currency stability.
Suggested Books for Further Studies
- “A History of the Euro” by Harold James
- “Exchange Rate Chaos: 1971-72 US Dollar Crisis and its Implications” by Jens-Morten Quistgaard
- “Understanding Global Currency Movements” by George K. Zestos
Related Terms with Definitions
- European Monetary System (EMS): A system established in 1979 to reduce exchange rate variability and achieve monetary stability in Europe.
- Exchange Rate Mechanism (ERM): Part of the EMS introduced to maintain currency alignment within narrowing bands.
- Floating Exchange Rate: An exchange rate system where the value of a currency is allowed to fluctuate according to the foreign exchange market.
