European Monetary System

From Free net encyclopedia

There are three stages of monetary cooperation in the European Union.

1 Stage I
2 Stage II
3 Stage III
4 See also
5 References

Stage I

European Monetary System (EMS) was an arrangement established in 1979 where most nations of the European Economic Community (EEC) linked their currencies to prevent large fluctuations relative to one another.

After the collapse of the Bretton Woods system in 1971, the EEC countries agreed in 1972 to maintain stable exchange rates by preventing exchange fluctuations of more than 2.25% (the European "currency snake"). In March 1979, this system was replaced by the European Monetary System, and the European Currency Unit (ECU) was defined.

The basic elements of the arrangement were:

The ECU: A basket of currencies, preventing movements above 2.25% (6% for Italy) around parity in bilateral exchange rates with other member countries.
An Exchange Rate Mechanism (ERM)
An extension of european credit facilities.
The European Monetary Cooperation Fund: created in October 1972 and allocates ECUs to members' central banks in exchange for gold and US dollar deposits.

Periodic adjustments raised the values of strong currencies and lowered those of weaker ones, but after 1986 changes in national interest rates were used to keep the currencies within a narrow range. In the early 1990s the European Monetary System was strained by the differing economic policies and conditions of its members, especially the newly reunified Germany, and Britain permanently withdrew from the system. This led to the so-called Brussels Compromise in August 1993 which established a new fluctuation band of +15%.

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Stage II

main article: European Exchange Rate Mechanism

The European Monetary System was no longer a functional arrangement in May 1998 as the member countries fixed their mutual exchange rates when participating in the euro. Its successor however, the ERM-II, was launched on January 1, 1999. In ERM-II the ECU basket is being discarded and the new single currency Euro has become an anchor for the other currencies participating in the ERM 2. Participation in the ERM 2 is voluntary and the fluctuation bands remain the same as in the original ERM, i.e. +15 %, once again with the possibility of individually setting a narrower band with respect to the euro. New members became Denmark and Greece.

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Stage III

main article: Economic and Monetary Union of the European Union

The EMS-2 is sometimes described as "waiting room" for joining the Economic and Monetary Union of the European Union. In the EMU (stage III) the actual currencies in the participating member states are replaced by Euro banknotes and coins.

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