A point of departure and primary research question of the present project was to analyse the economic impact of different exchange rate arrangements on countries in Europe, from 1870 to the present. This requires construction of real effective exchange rates, that is, exchange rates that take account of the trade relations of a country and its relative price development. The impact of an exchange rate arrangement can be broad but the project particularly focus on the effect of the exchange rates on competitiveness and economic growth.
The points of departure also included the two following questions: what has been the sustainability of the different exchange rate arrangements, and which have been the major theoretical and political arguments for their implementation? The sustainability of an exchange rate arrangement can be assessed ex post from the factors that ended its existence: to what extent were they endogenous or exogenous to the arrangement? This could be a topic for a review article since there is a vast literature on the break-down of the interwar gold standard and the post-war Bretton Woods system and a growing literature on design flaws in the euro, casting the votes for the endogeneity failures. However, the project decided to prioritize the other research questions as more challenging for new research. And in the study of the theoretical and political discourse since the late 19th century, the project has identified two strands of economic rationales: one which views the adoption of fixed exchange rates as fostering economic discipline, and one which focuses on the role of the international balance problem and thus the need for discretionary interventions, for example by the establishment of an international lender of last resort.
The task of constructing real effective exchange rates naturally included nominal effective exchange rates and, which was not clear at the outset, it became vital also to extend it into recent years. The database now covers 1870-2016 for 18 European countries before World War I and successively increasing to 24 from 1993 and up to 2016. In long-term comparisons it is important that the series are constructed in a consistent way. This has motivated an extension forward in time of the effective exchange rates instead of relying on available series. For the recent period the indices include more eastern countries than the available Eurostat-Ameco indices, and are, arguably, methodologically superior to the Bank for International Settlement (BIS) indices, by having annual weights and higher representativity in the sample of trade partners. For example, the Baltic countries have significant trade with former Soviet republics which previously have not been accounted for in exchange rate indices.
In the pursuance of the project, much effort has been devoted to international communication and collaboration. Two workshops on the history of exchange rates have been arranged in Lund, in April 2017 and December 2018. Two sessions on exchange rates and related monetary issues were organized by the project members at the World Economic History Congress in Boston, in the summer 2018. Furthermore, two workshops on "Critical moments in the development of modern monetary systems", the first in March 2018 and the second in March 2019 at Banque de France in Paris, have been co-organized by the project. Project papers have also been presented at other occasions, such as at the workshop "Building up historical financial and banking databases", Paris School of Economics in April 2016; at the conference to Commemorate Karl Gunnar Persson and of the Danish Economic History Society, Copenhagen in December 2016; at the conference of the British Economic History Society, London Holloway in March-April 2017; at the conference of the European Historical Economics Society, Tübingen in September 2017; at the Swedish Economic History Meeting, Stockholm in October 2017; at the conference of the Swedish Network for European Studies in Economics and Business, Lund in November 2018.
The main contributions of the project include the construction of the database on nominal and real effective exchange rates for European countries, 1870-2016. The role of exchange rates for economic performance, in particular in the long-term, is so far largely unexplored. The publication of the database will make possible for scholars to fill this gap in research.
A second contribution is evidence for important insights about the connection between movements in exchange rates and economic growth. One is that catch-up of countries within Europe since the late nineteenth century has more often than not been sustained by a weak currency. The mechanism behind this is that countries at a lower level of income as a rule have a lower level of prices and cost. When they integrate, and also catch-up with richer countries, their inflation rate will be higher than in the richer countries. This higher inflation will more or less erode the gains in competitiveness they have achieved in the process of catch-up, but by depreciation of the currency the loss can be compensated. Cases in point are the Scandinavian countries during the interwar period, and Mediterranean countries and Ireland during the late twentieth century. Furthermore, analysis shows that the exchange rates, when flexible, have been a counter-cyclical stabilizer. This is not surprising but the actual effects are rarely estimated. In the twenty-first century European countries with the euro, or a currency somehow pegged to the euro, have not been able to benefit from this stabilizer while countries with a floating currency have done so. A case in point is that when the Global Financial Crisis struck in 2008-2009, the currency float alleviated the effects for Poland and Sweden, while the euro aggravated them for the Baltic countries and Finland.
A third contribution is that paradigmatic shifts in economic theory have been decisive in the reform of international monetary systems. While transaction costs are anyway seen as important in the design of monetary arrangements, in other aspects two opposing arguments have been crucial for institutional arrangements in the monetary system: one emphasizing the problem of external balance and the other emphasizing the problem of monetary and fiscal discipline. The balance argument was influential in the creation of the post-war Bretton Woods system and emerged with Keynesian economics from the 1930s. Before that, in the restoration of the gold standard in the 1920s the discipline argument was a guiding principle. Despite a vast body of literature, the role of these contrary arguments in the process of European monetary integration has not been highlighted before. Examining official documents and the literature, the project has uncovered how the balance argument was seen as fundamental in the 1960s and early 1970s, and then was superseded by the discipline argument, which was decisive for the Maastricht Treaty and the design of the European Economic and Monetary Union. Moreover, the project has found that in the twentieth century the discipline argument retrospectively has been ascribed to the nineteenth century international gold standard. However, an examination of contemporary debates shows that the discipline argument had no role but the creation of the gold standard was an outcome of an international movement for standardization, and relative prices of gold and silver.
Some more research questions have been specified as possible to investigate with the help of the data collected for the database on nominal and real effective exchange rates. One is whether the depreciation of currencies in the 1930s shuffled the burden of the depression on to other countries, being a 'beggar-thy-neighbour policy', as according to the conventional wisdom. If this idea holds, one should expect an increase in exports, along with a decline in imports, to trading partners against which the exchange rate depreciated. Controlling for the general development of trade, which mostly was in decline, a preliminary examination finds no support for a beggar-thy-neighbour effect of the exchange rate adjustments among these countries in the 1930s. Another question concerns the impact of the big European devaluations in 1949. These are often mentioned in the literature but so far not closely examined. According to the purchasing power parity theory, its effects would soon have expired. A preliminary examination of the nominal and real effective exchange rates shows, first, big differences in the size of devaluations undertaken, and second, that while the effect quickly receded for some countries, it was sustained through the 1950s for others. This calls for a closer examination of the effects on post-war European growth.
The project results have been made known in the exchange with international scholars in connection with workshops and conferences, as described above. The database on nominal and real effective exchange rates is publicly available on the website of the Department of Economic History at Lund University – it is completed with long-term series on Cost of Living/CPI (used for the construction of real effective exchange rates), since it was found that for several countries such are not easily available or are of an insufficient quality. Other results are in working papers and forthcoming.