both the effects of the oil price increases themselves and the policies adopted in response differed across countries. denmark and the united kingdom exited the snake soon after entering, italy dropped out in 1973, and france participated intermittently during the mid - 1970s, first dropping out in 1974. the snake was a failure, a failure that created problems, though not clearly a crisis. if exchange rates among members of the eec were to be stabilized in the new world of floating rates, the community had to invent a substitute. in 1978, the members of the eec created the european monetary system, which started with an exchange rate mechanism ( erm i ) that limited currency fluctuations relative to a basket of national currencies. 11 all members except the united kingdom participated in erm i. the arrangement also committed central banks to intervene to support the resulting bilateral rates as they approached the limits of the permissible bands. countries in the erm also adopted policies that lowered inflation, bringing interest rates into closer alignment. the initial success of the erm encouraged european leaders to lift capital controls and built momentum toward monetary union, which was reflected in the maastricht treaty ( the treaty on european union ), agreed to in 1991 and signed in 1992. however, strains also emerged under the erm, in an environment in which the bundesbank emerged as the dominant central bank in europe, and the deutschmark as the dominant european currency. this led other countries in the erm to follow german monetary policy. in part as a consequence of german reunification, the pressures generated by diverging fiscal policies and tightening german monetary policy contributed to the erm crisis of 1992. moreover, the earlier lifting of capital controls and the promises to intervene to support rates that were ultimately not credible put tremendous pressure on the pegged rates – and on relations among some members of the eec. the crisis forced the united kingdom and italy out of the erm and forced others ( portugal and spain ) to devalue their currencies. the erm crisis was an apt illustration of the difficulties of trying to manage exchange rates among countries operating under markedly different economic conditions. however, rather than dissuading policymakers from trying to limit exchange rate fluctuations within a system that would nonetheless preserve the possibility of some exchange rate flexibility, the experience seemed to encourage them to continue with the plan of the maastricht treaty to introduce a single currency and a common monetary policy at the beginning of 1999. here indeed was an

mr latter comments on the euro : first impressions from hong kong address by mr tony latter, a deputy chief executive of the hong kong monetary authority, at the seminar entitled, “ five months of the euro : what does it mean for business in hong kong? ” held in hong kong on 11 may 1999. introduction it ’ s probably true to say that the arrival of the euro passed without incident and almost without notice in hong kong. you might think this a somewhat ungracious statement with which to begin. but it certainly does not mean that the euro is unimportant to hong kong. what the statement tells us, first and foremost, is that the preparations for the euro by those sections of the community for which its arrival was of immediate importance - and here i refer principally to the financial sector and parts of the commercial sector - were totally successful in ensuring a smooth and hence unremarkable transition. i would like to congratulate all concerned on that achievement. at the other extreme, my opening remark could also be taken as confirmation that the arrival of the euro was of no direct importance to the man in the street, who may never even have seen a european currency ; even if he has, he will not have to confront the euro in physical form until the banknotes appear in 2002. i should like to spend a few minutes discussing two aspects of the euro. one is its impact on and implications for the conduct of financial and commercial business here, essentially at the micro level. the other relates to some macroeconomic policy aspects of the euro ’ s birth, which are also relevant to hong kong despite our being some 10, 000 kilometres distant. consequences for financial markets and trade as one would have expected, the wholesale financial markets switched quite rapidly to quoting and dealing mostly in euros instead of the constituent currencies, and many businesses also chose quickly to redenominate their relevant accounts, although a significant number have not yet done so. the choice is largely one of practicality and economy, rather than of economic significance, given that, formally, the parent currencies are now no more than subdenominations of the euro ; one might therefore expect people to opt quite quickly for the convenience of a unified denomination rather than to continue operating with up to eleven separate ones. so far as i have been able to ascertain, the euro is trading in foreign exchange markets just as one would expect a major international currency to trade - that is, with good liquidity and fine