The second major crisis to hit the European exchange rate mechanism in a little less than a year -- this time focused mainly on the French franc -- was yet another demonstration of the adage that you cannot fool all of the people all of the time.

But you may, as the saying also notes, fool all of the people some of the time. The rate mechanism did hold together for more than five years -- from January 1987 until September 1992 -- as a system of essentially fixed exchange rate relationships.

There were no currency realignments, in large part because the markets came to believe the system could be maintained for an indefinite period.

Credibility Lost

However, once the market perceived that prevailing rate relationships were inconsistent with underlying economic conditions, and once there was any doubt about a country's will to do whatever was needed to keep its rate in line, credibility was lost.

It then became practically impossible -- either through domestic policy adjustments or official exchange-market intervention -- to maintain the system in face of the massive shifts in private funds.

When it is not even clear that policy authorities in the various participating countries have the same priorities, defense of the system becomes even more difficult.

To many European countries, a mechanism with rigid rate relationships was a way station toward the more basic goal of a common currency and common central bank.

Maintaining rigid exchange rate relationships was a means of enforcing the convergence of domestic policies and economic conditions needed before implementation of a common currency.

Britain's Motives

Clearly, not all of the key countries were wholeheartedly behind that ultimate goal of a common currency.

In my view, the British had joined the rate system basically for their own domestic purposes of restoring discipline and international competitiveness to their economy, not because they were particularly enchanted with the idea of moving toward a common currency.

When the market forced the politicians to realize their exchange-rate policy had outlived its domestic usefulness, it was something of a blessing for the British economy.

The French were also using the rigidity of the rate mechanism to discipline their domestic economy and reduce inflation, and in addition to enhance the relative stature of France and the franc in Europe and the world. But unlike the British, they seemed to believe strongly in the drive toward a common currency.

That attitude was derived from political as much as economic imperatives. Politically, it was a way of restraining the independent influence of Germany by distributing power to broader European institutions.

Germany's Troubles

As the underlying political objective of the drive toward a common currency gradually became understood in Europe, considerable resistance developed because of fears that nations not only would lose more economic sovereignty than expected but also would see much of their traditional political and social authority eroded.

The recession that was prolonged and deepened in Europe by the inflationary impact on Germany of the unforeseen merger of East and West Germany made political problems even worse.

In Germany itself, the political and monetary authorities may have had divergent views. The independent German central bank's overriding concern is domestic price stability.

As a result, even apart from any doubts it might have about the desirability of giving up the D-mark for a common currency, as an institution it must have felt it could give only limited consideration to the impact of its policies on the other countries.

The burden of adjustment was then left to German fiscal policy or to realignment of the European rate mechanism. The various conflicting political and economic attitudes and objectives were simply too much for the system to bear. Perhaps it could have held together longer without the shock of German unification.

The Value of Flexibility

But there are always economic and political surprises in the world. A certain degree of exchange rate flexibility -- though not necessarily freely floating rates -- generally helps nations and the world economy absorb such surprises more smoothly.

What Europe has now is a floating rate system within very wide bands. That ought to permit economic policies that will move it out of recession more quickly.

There is no reason to rush back into rigid bands. Indeed, in terms of locking markets together, a common currency is preferable to rigidly fixed rates, because it does not depending on fooling the public that rate relationships can be held indefinitely.

In any event, the decision on fixed rates or a common currency should await the time when economies have converged at high levels of employment and reasonably low inflation rates.

The attempt to use the rate mechanism to force convergence was clearly counterproductive. But Europe also needs time to think harder about the whole process of economic and political unification, now that the basic issues have surfaced and are much more clearly before the public.

Mr. Axilrod is vice chairman of Nikko Securities Co., New York.

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