European Monetary System
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European Monetary System (EMS) was an arrangement established in 1979 where most nations of the European Union (EU) 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 to maintain stable exchange rates by preventing exchange fluctuations of more than 2.25%. By March 1979, EC established European Monetary System, and created the European Currency Unit (ECU).
The basic elements of the arrangement were:
- The ECU: A basket of currencies, preventing movements above 2.25 % around parity in bilateral exchange rates with other member countries.
- An Exchange Rate Mechanism (ERM)
- The European Monetary Cooperation Fund: created in October 1972 and allocates ECUs to members' central banks in exchange for gold and 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%.
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, European Monetary System 2, was launched on January 1, 1999. In EMS 2 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.
External links
- The European Monetary System in 1978 (http://www.kb.cz/NASA/utility/SRVFrame?p=/en/euro/clanek_4.shtml)
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