EUropean Monetary System : Developments & Perspectives, Occ. Paper No. 73

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1990
• eBook ISBN: 9781557751720

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Contents

Preface

I. Introduction

II. Development of the EMS

Membership

Evolution

Exchange Rate and Intervention Mechanism

The ECU

Credit Facilities

Changes in the Institutional Setup

Asymmetry in the EMS

III. Economic Performance

Exchange Rate Developments: Trends and Issues

The Realignments of 1985–86

The Plaza Agreement

The January 1987 Realignment

The Louvre Accord and Developments in 1987

Developments in 1988–89

The January 1990 Realignment and Other Developments

Exchange Rate Variability

Economic Convergence Among EMS Member Countries

Conceptual Considerations

External Balances

Prices and Costs

External Competitiveness

Monetary Policy

Fiscal Policy

Conclusion

IV. Financial Integration in the European Community

The Internal Market Program and Financial Integration

Liberalization of Capital Movements in the EC

The Capital Liberalization Directive of 1988

Progress of Capital Liberalization in EC Countries

The Second Banking Directive

The Solvency Directive

V. Monetary Integration in the European Community

The Internal Market Program and Monetary Integration

Strategies of Monetary Integration

Debate About Future Monetary Integration in the EC

The Delors Report

Summary of the Delors Report

The Delors Report and the Werner Report

Discussion of the Delors Report

The U.K. Proposals for EMU

Coordination of Fiscal Policies

Central Bank Independence

Implementation of Stage One and Intergovernmental Conference on EMU

Appendices

I. Statistical Tables

II. Press Communiqués

III. Chronology of EC Monetary and Financial Integration

Bibliography

TABLES

Appendix I.

1. EMS: Periods of Strain

2. EMS: Economic Measures in Connection with Realignments

3. EMS Realignments: Percentage Changes in Bilateral Central Rates

4. EMS: Bilateral Central Rates

5. EMS: ECU Central Rates

6. Deutsche Mark Interventions in the EMS

7. Composition of the ECU

8. Percentage Weights of Member Currencies in the ECU

9. Creation of ECUs by Swap Operations, 1979–89

10. Variability of Bilateral Nominal Exchange Rates, 1974–89

11. Variability of Bilateral Real Exchange Rates, 1974–89

12. Variability of Nominal and Real Effective Exchange Rates, 1975–89

13. External Current Account, 1975–89

14. External Trade Account, 1975–89

15. External Current Account, 1975–89

16. External Trade Balances of ERM Countries, 1975–89

17. Consumer Price Indices, 1975–89

18. GNP Deflators, 1975–89

19. Wages in Manufacturing, 1976–89

20. Unit Labor Costs, 1976–88

21. Changes in Relative Consumer Prices Adjusted for Exchange Rate Developments in ERM Countries, First Quarter 1979-First Quarter 1990

22. Changes in Relative Normalized Unit Labor Costs Adjusted for Exchange Rate Developments in ERM Countries, First Quarter 1979-First Quarter 1990

23. Changes in Relative Value-Added Deflators in Manufacturing Adjusted for Exchange Rate Developments in ERM Countries, First Quarter 1979-First Quarter 1990

24. Real Effective Exchange Rates Relative to Federal Republic of Germany, 1975–88

25. Evolution of Export Market Shares, 1979–88

26. Broad Money, 1975–89

27. Velocity of Broad Money, 1975–88

28. Matrix of Correlation Coefficients Between Short-Term Interest Rates, January 1975-March 1979; April 1979-December 1982; January 1983-December 1986; and January 1987-December 1989

29. Matrix of Correlation Coefficients Between Long-Term Interest Rates, January 1975-March 1979; April 1979-December 1982; January 1983-December 1986; and January 1987-December 1989

30. Variability of Interest Rates, January 1975-December 1989

31. General Government Budget Balances, 1975–87

32. Real Growth and Unemployment, 1971–89

CHARTS

Section III.

1. ERM: Movements of Exchange Rates Against the ECU

2. Movements of the ECU Against the U.S. Dollar

3. Short-Term U.S. Dollar and Deutsche Mark Interest Rates, 1984–90

4. Short-Term U.S. Dollar and French Franc Interest Rates, 1984–90

5. Short-Term U.S. Dollar and Pound Sterling Interest Rates, 1984–90

6. Effective Exchange Rates, 1979–90

7. EMS: Position in the Narrow Band, 1986–89

8. EMS: Position in the Wide Band, 1986–89

9. Short-Term U.S. Dollar and Japanese Yen Interest Rates, 1984–90

10. Short-Term U.S. Dollar and Italian Lira Interest Rates, 1984–90

11. Short-Term French Franc and Deutsche Mark Interest Rates, 1984–90

12. Short-Term Italian Lira and Deutsche Mark Interest Rates, 1984–90

13. Short-Term Pound Sterling and Deutsche Mark Interest Rates, 1984–90

14. ERM: Maximum and Minimum Rates of Inflation

15. ERM: Consumer Price Index Relative to Federal Republic of Germany

16. ERM: Normalized Unit Labor Costs Relative to Federal Republic of Germany

17. ERM: Value-Added Deflator Relative to Federal Republic of Germany

18. Belgium: Indicators of Competitiveness Relative to ERM Partners

19. Denmark: Indicators of Competitiveness Relative to ERM Partners

20. France: Indicators of Competitiveness Relative to ERM Partners

21. Federal Republic of Germany: Indicators of Competitiveness Relative to ERM Partners

22. Ireland: Indicators of Competitiveness Relative to ERM Partners

23. Italy: Indicators of Competitiveness Relative to ERM Partners

24. Netherlands: Indicators of Competitiveness Relative to ERM Partners

The following symbols have been used throughout this paper:

• … to indicate that data are not available;
• — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
• – between years or months (e.g., 1984–85 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
• / between years (e.g., 1985/86) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

Appendix I Statistical Tables

Table 1. EMS: Periods of Strain¹

Source: Fund staff estimates and calculations.

¹ Defined as periods with reports of substantial interference in the exchange market by intervention, capital and exchange controls, or measures of monetary policy motivated by exchange rate developments. Notation: B-Belgium; BF-Belgian franc; D-Denmark; DKr-Danish krone; F-France; FF-French franc; G-Federal Republic of Germany; DM-deutsche mark; Ire-Ireland; £Ir-Irish pound; I-Italy; Lit-Italian lira; N.-Netherlands; f.-Netherlands guilder; U.S.-United States: $-U.S. dollar; CA-current account.

² The divergence indicator shows the movement of the exchange rate of each ERM currency against the (weighted) average movement of the other ERM currencies. The criterion used is the divergence of the actual daily rate of the ERM currency, expressed in ECUs, from its ECU central rate. Adjustments are made for those currencies contained in the ECU but not participating in the ERM and the wider margins observed by the Italian lira. A currency crossing a “threshold of convergence,” set at 75 percent of the maximum divergence spread, raises the presumption that the authorities concerned will take corrective action. In practice, this provision has played only a limited role. For more details, see Ungerer, Evans, and Nyberg (1983), p. 15.

Table 2. EMS: Economic Measures in Connection with Realignments

Sources: Commission of the European Communities, and Fund staff calculations.

Table 3. EMS Realignments: Percentage Changes in Bilateral Central Rates¹

Sources: Commission of the European Communities and Fund staff calculations.

¹ Calculated as the percentage change against the group of currencies whose bilateral parities remained unchanged in the realignment, except for the realignments (Mar. 21, 1983, July 22, 1985) in which all currencies were realigned. For these the percentages are shown as in the official communiqué.

Table 4. EMS: Bilateral Central Rates¹

Sources: Commission of the European Communities and Fund staff calculations.

¹ Expressed as the price of 100 units of the currency on top of the column in the currency in the stub.

² The bilateral central rates for the Spanish peseta on June 19, 1989, the date of its entry into the ERM, are the same as those listed here, except for the rate vis-à-vis the Italian lira, which stood at 9.01899 on that date.

Table 5. EMS: ECU Central Rates¹

Source: Commission of the European Communities.

¹ The change of any central rate expressed in terms of ECUs implies a simultaneous change of all other ECU central rates, because the ECU is made up of a basket of currencies. Positive sign indicates depreciation relative to the ECU.

² Percentage change from central rate as of May 1983, when the notional central rate of sterling was revalued and the other central rates devalued as part of a package to arrive at new common agricultural prices. No change in bilateral central rates and intervention limits of participating currencies occurred at this time.

³ On June 19, 1989, the date of entry into the ERM.

Table 6. Deutsche Mark Interventions in the EMS

(In billions of deutsche mark)

Source: Deutsche Bundesbank, Annual Report, 1989.

Note: Deutsche mark intervention by other central banks participating in the EMS exchange rate mechanism and EMS interventions by the Bundesbank. Plus (+) equals deutsche mark sales or expansionary impact on liquidity in Germany. Minus (–) equals deutsche mark purchases or contractionary impact on liquidity in Germany.

¹ Indicates the extent to which deutsche mark interventions in the EMS and the settlement of creditor and debtor positions in the EMCF affected the net external position of the Bundesbank and thus the banks’ provision with central bank money; excludes transactions connected with the winding-up of the snake, which was succeeded by the EMS.

² As of the beginning of the EMS on March 13, 1979.

Table 7. Composition of the ECU

Source: European Community documents.

Table 8. Percentage Weights of Member Currencies in the ECU¹

(Annual second quarter average)

Sources: International Monetary Fund, International Financial Statistics, Data Fund, and Fund staff calculations.

¹ Calculations of percentage weights are based on New York noon quotations. The weights may not add because of rounding.

² Weights are those of the European Unit of Account (EUA), which was introduced in certain areas of EC activities as of April 21, 1975. The EUA is defined as a basket of all ECU currencies; this basket was also used for defining the ECU in 1979.

³ Using currency composition of ECU effective September 21, 1989.

Table 9. Creation of ECUs by Swap Operations, 1979...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• I. Introduction
• II. Development of the EMS
• III. Economic Performance
• IV. Financial Integration in the European Community
• V. Monetary Integration in the European Community
• Appendices
• Footnotes