From Market Discipline to Monetary Integration: Germany’s Response to Financial Threats in the EMS

This paper examines Germany’s role in the emergence of the European Economic and Monetary Union, highlighting how financial threats reshaped policy priorities in favour of monetary unification. Focusing on the 1987 EMS realignment and the 1992–1993 EMS crisis, it traces a learning process that revealed the inadequacy of a quasi-fixed exchange rate system in a globalised financial environment, as speculative pressures increasingly diverged from what was considered economically intelligible. In 1987, the Bundesbank refrained from intervening to support its European partners, whereas in September 1992 it abandoned its traditional non-intervention stance and actively defended the French franc. This intervention marked a critical turning point: Germany and the Bundesbank prioritised EMU and the political goal of European integration over strict adherence to market discipline. At the same time, it demonstrated that EMU offered the only viable framework for combining European market integration with an increasingly unintelligible speculative financial environment. The paper reconstructs the reasoning and strategies of key policymakers to show how financial threats shaped German preferences and contributed to the emergence of EMU as a protective institutional framework, using archival research and elite interviews of former decision-makers. By analysing Germany, a country traditionally considered market-liberal, the study demonstrates that EMU’s origins cannot be understood solely as a market-accommodating project. Even for the strong-currency country Germany, financial threats and the detachment of market movements from economic fundamentals reshaped policy choices, highlighting the protective and integrative function of EMU in light of the financial globalisation of the 1980s and 1990s.