Turbulence has continued in European foreign exchange markets over the last three months. The realignment of European exchange rates in September was not particularly conducive to promoting economic stability, and subsequent realignments have produced more strain. We had argued for some time before Black Wednesday that European exchange rates were not near their fundamentals. We have often said that such a realignment might be beneficial. Any realignment involves some loss of credibility, but the disorderly rout seen in September appears to have damaged the reputation of a number of governments outside the core ERM countries, and it has affected confidence badly. A realignment could have been an aid to a weak recovery. It appears that the effects of the realignment and decline in confidence in the abilities of the authorities have helped turn what might have been a concerted upturn in France, Italy and the UK into a period of, at best, stagnation.