Paul De Grauwe and Yuemei Ji write this nice paper on crisis in the two monetary systems. EMS was a system adopted by European countries before adopting Euro. Under this currencies were fixed with D-Mark.
The authors cone across opposite situations in the two cases. In EMS, the countries could not manage short term interest rates and in EZ they could not manage the long term interest rates:
Our empirical results support the theory we developed about the different nature of the fragility of two monetary regimes, the EMS and the Eurozone. In the EMS-regime governments issued debt in their own currencies. Therefore, they could and did guarantee
that the liquidity was always available to stabilize the government bond markets in times of crisis. This was not the case in the money markets (short end). The short-term interest rates (interbank interest rates) were dominated by the need to keep the exchange rate fixed. In times of crises (i.e. expectations of a devaluation) the exchange rate system relied on the intervention capacity of the central bank concerned, i.e. its capacity to convert its own liabilities into marks at a fixed price. This capacity in turn was limited by the willingness of the Bundesbank to provide the marks necessary to do the interventions. As argued earlier, the commitment of the Bundesbank to be a lender of last resort to the other central banks of the system was not fully credible, thereby triggering self-fulfilling crises led to regular devaluations. In the end when in September 1992 the Bundesbank refused to continue to be the liquidity backstop of the system, the EMS broke up11..
In the Eurozone, the situation was exactly the reverse. The absence of a devaluation risk had the effect that spreads could only reflect default (credit risks). In the money market the ECB was willing to provide all the necessary liquidity to prevent major counterparty credit risks in the interbank market from leading to a liquidity crisis. At some point during the debt crisis this led to massive accumulation of Target2 liabilities in the Southern European countries matched by large claims in Northern Eurozone countries, which sustained the banking systems in these countries (see Figure 9). In the government bond market there was no such commitment of the ECB. As a result, fears of payment difficulties could easily lead to a liquidity crisis and large volatilities of the long-term bond rates.
Thus the difference in the money market and government bond markets’ volatilities can be attributed to the differences in the role of the central banks in both regimes. In the EMS there was no credible lender of last resort in the foreign exchange markets while there was a lender of last resort one in each of the national government bond markets. In the Eurozone, there was a lender of last resort in the interbank market while there was none in the government bond markets.