I was privileged to know Mike Mussa for almost 25 years. We met when he joined the Council of Economic Advisers in the mid-1980s. I first began to encounter him regularly up close and personal during the early 1990s when, as the economic counselor of the International Monetary Fund (IMF), he participated in meetings of Working Party Three (WP-3) of the Economic Policy Committee of the Organization for Economic Cooperation and Development (OECD). Professor Mussa delighted in lecturing WP-3 about the economic outlook. Since WP-3 was dominated by representatives of European countries (with eight of the 11 country chairs), when economic and financial developments in Europe turned serious, such as during the crises of the Exchange Rate Mechanism (ERM) in 1992–93, Mike turned his attention to European economic policies.
In December 1992, when the first of the ERM crises was drawing to an end, Mike told WP-3 that it was necessary to restore growth in Europe to prevent another crisis. He observed that it had been important for the Bundesbank and Germany to fight the anti-inflation battle in the wake of German monetary unification, but that battle had been won. He said that Europe needed lower interest rates as soon as possible—for example, a decline in interest rates by 300 basis points by the end of the summer of 1993.
German three-month interest rates declined only 170 basis points from their December 1992 average to their July 1993 average. The second ERM crisis broke out in late July and early August, forcing the Europeans to agree on August 2, 1993 to a substantial widening of the ERM exchange rate bands to 15 percent. This appeared at the time to doom near-term prospects for Economic and Monetary Union (EMU) in Europe. Mike called me at the Federal Reserve sometime in the first week of August 1993 and said, in effect, “When will they learn?” They did not learn, and EMU went ahead in 1999.
During the European sovereign debt crisis of 2010–12, Mike and I often recalled the 1992–93 ERM crises and wondered whether anything had been learned. Unfortunately, Mike did not live long enough to obtain a definitive, positive answer to his question.