ERM Crisis 1992
The 1992–93 ERM crisis (Black Wednesday in the UK) was a trilemma event: fixed parities, free capital, and a Bundesbank that would not ease for the periphery.
Definition
After German unification, high German rates were imported via pegs. The UK and Italy could not live with those rates in recession. Speculators (famously Soros/Druckenmiller on sterling) forced devaluations. The ERM bands later widened to 15%.
Why it matters
It is the cleanest modern trilemma exam. ‘Defend and cut’ was not available.
Case
16 September 1992: the UK hiked to 12% and still left the ERM. The lira and peseta were also hit. France held with help; the system was rewritten in 1993.
How to read it
Reserve loss velocity, rate differentials versus Germany, and political willingness to sacrifice the domestic cycle. Those three decide a peg fight.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- The Logic of Currency CrisesObstfeld · 1994 · NBER / Cahiers économiquesSelf-fulfilling peg attacks — the ERM generation of models.