Encyclopedia of Money: Snake

The so-called snake was a coordinated policy among European Community (EC) countries to constrict exchange rate variations between member countries to a narrower band than allowed by the International Monetary Fund (IMF). It was the first stage toward the monetary unification of Europe, a goal that appears now within reach with the introduction of a European currency unit, the euro. The snake system began in March 1972 and remained in operation until January 1979 when the European Monetary System (EMS) replaced the Economic and Monetary Union (EMU). The EMS and its predecessor, the EMU, were agreements of cooperation in monetary affairs between members of the EC. The EMS took a further step toward monetary unification with the introduction of the European Currency Unit (ECU).

Early in the 1970s the IMF allowed the currencies of member countries to vary within a range of 2 1/4 percent above or below parity with the dollar, or 4 1/2 percent overall. The members of the EMU committed themselves to keeping the variation between European currencies to within 2 1/4 percent of each other and fluctuations in the aggregate of European currencies was kept with the 4 1/2 percent band of parity with the dollar. The European currencies became known as the “snake in the tunnel’ because these currencies moved up and down together relative to other currencies. When the Belgium-Luxembourg monetary union kept its own currency fluctuations within a tighter range, then the “snake in the tunnel” began to reveal a “worm in the snake.” When the fixed exchange-rate regime broke down in 1973, and the dollar floated freely, the European “snake in the tunnel,” became the “snake in the lake.”

The snake terminology survived in the EMS, in which a measure of exchange-rate divergence from other European currencies was treated as a warning sign or signal that intervention may be necessary. This warning sign was called the rattlesnake.

The snake was intended to keep EC currencies fluctuating in step with each other, a preliminary measure to the complete monetary unification of Europe. The transition to a European currency unit, the euro, to be managed by a European central bank, will remove the need for this sort of coordination, as the euro replaces the German mark, French franc, and other European currencies.