The main pressure on the system

However, the system’s lack of flexibility soon became a problem. The main pressure on the system came from the 1990 German reunification, which necessitated heavy spending by the German government to aid the weak economy of former East Germany.


Government debt in Germany increased, but monetary policy was tightened to keep inflation low. As a result, German interest rates rose, putting upward pressure on interest rates in the other countries of the ERM. In September 1992 currency traders began to doubt the value of the currencies of some member states, and this led to a major speculative crisis as traders began heavily buying and selling these currencies.


This put severe pressures on the ERM, and its inability to respond by realigning exchange rates led to a weakening of member currencies.