Economics
European Monetary System
The European Monetary System (EMS) was an arrangement established in 1979 to stabilize exchange rates and facilitate economic cooperation among European Union countries. It included the European Currency Unit (ECU) as a unit of account and the Exchange Rate Mechanism (ERM) to manage currency fluctuations. The EMS laid the groundwork for the Economic and Monetary Union and the introduction of the euro.
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11 Key excerpts on "European Monetary System"
- Silvia Marengo(Author)
- 2018(Publication Date)
- Peter Lang International Academic Publishers(Publisher)
Chapter 3 Lessons from the European Experience: The EMS as an Instrument to Achieve Price and Exchange Rate Stability 3.1 Introduction The analysis of the monetary agreements concluded by the European Union during the last three decades constitutes the natural starting point of any study on monetary inte-gration in other geographical regions. Thus, the European experience establishes an example of a successful economic integration process. It has already been functioning for more than 30 years, trade has significantly increased among member states, and the European countries were able to rapidly rebuild their economies after the Second World War. Although the history of monetary agreements in Europe does not begin with the aftermath of the Second World War, this date constitutes probably the best starting point for the analysis of the long-term developments in European monetary integration. 123 This period is particularly important because it constitutes the beginning of the overall integration process that led to the creation of the European Economic Community (ECC), the European Monetary System (EMS), and finally the present plans for the economic and monetary union (EMU). The European Monetary System (EMS), launched on March 13, 1979, was conceived as another step in the unification of economic policies of the European countries. The EMS constitutes only one element of an important set of agreements (Giavazzi and Giovannini, 1988) among European countries in areas of trade, industrial and agricultural and these agreements rest on ex-change rate stability. The EMS was widely perceived, at least until 1992, as a success, and probably the most interesting aspect of it to study is whether it has achieved the goal of providing sufficient stability in European prices and exchange rates.
eBook - PDF- H. Tomann(Author)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
Lecture 8 The New European Monetary System When the European Economic and Monetary Union was founded, the established European Monetary System (EMS) was not com- pletely abandoned. Still, demand for stable monetary relations be- tween the member states of the monetary union and other EU mem- bers who had not joined the EMU required an institutional setting. The European Council decided to provide a mechanism of exchange rate interventions to respond to this demand. In a resolution of 1997, the rules of the EMS were adapted to the changed task and the system continued to exist as Exchange Rate Mechanism II (ERM II) with a changed structure and a changed scope. Although all member states had signed the Maastricht Treaty in 1992, four members stayed outside when the EMU was established. Greece had not fulfilled the convergence criteria in 1998 but joined the monetary union two years later. The other three EU mem- bers, the United Kingdom, Denmark and Sweden, have been absent voluntarily since then, the UK and Denmark by claiming an opt- out clause, Sweden, on the other hand, having joined the European Union only in 1994, by refusing accession to the euro area. Among these countries only Denmark responded to the Council's offer and joined the ERM II. The European Monetary System gained new importance, how- ever, when ten states entered the EU in May 2004. These were mainly the post-socialist countries in Central and Eastern Europe neighbouring the EU: The Visegrad countries, Poland, Czech Re- 135 136 Basic choices for pre-ins public, Slovakia and Hungary, the Baltic states, Estonia, Latvia, Lithuania and, in addition, Slovenia. With this process of 'Eastern enlargement', also Cyprus and Malta joined the EU. The new mem- bers agreed, by signing the Maastricht Treaty, to take into account the implications of their monetary and exchange rate policies for other EU member states.
eBook - PDF- Athina Zervoyianni, George Argiros, George Agiomirgianakis(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
Another argument was that stable European exchange rates would lead to a reduction of average inflation in the Community, because, given the nominal rigidities in the member states’ labour and product markets, floating exchange rates were in general inflationary. Yet another argument was that monetary integ-ration would allow Community countries to simultaneously adopt expansionary monetary policies and thus create a high level of aggregate demand that was necessary to combat unemployment. 2 Accordingly, in December 1978 the Council of Ministers adopted a resolution on the establishment of a European Monetary System (EMS). The EMS, began to operate in March 1979. Entry into the system was not compulsory for the members of the Community, and it was also possible for a country to participate in only some of the operations of the system. 3 The EMS had three components: the European currency unit (ECU); the Exchange Rate Mechanism (ERM) which consisted of bilateral exchange-rate fluctuation margins; and a system of credit facilities. 182 EUROPEAN INTEGRATION The ECU was a composite currency, consisting of all the EC curren-cies properly weighted. The weight of each national currency in the ECU was intended to reflect the share of the GDP of the member state concerned in Community GDP. In the EMS agreement there were provisions for adjusting these weights. Such adjustments were undertaken following the enlargements, namely in September 1984 when Greece became a member of the Community, in September 1989 when Spain and Portugal joined, and in September 1996 when Austria, Finland and Sweden joined the EU. Each currency participating in the ERM had a reference rate expressed in ECUs, the ‘ECU central rate’ of exchange. From this rate, bilateral central rates were derived for each pair of currencies in the system.
eBook - ePub- Birol Yesilada, David Wood(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
9Economic and Monetary Union
The history of the Economic and Monetary Union (EMU) represents a bold adventure that carries with it political and economic risks. With a single monetary authority and a single European currency, the euro (€), replacing the national banknotes and coins of 16 member states, the EMU represents the climax of European economic integration. In this chapter, we will provide an overview of the regional and systemic developments that gave rise to the coordination of exchange rate policy in the European Union (EU) countries, followed by an analysis of the “snake in a tunnel” and the failure of the members to achieve a zone of monetary stability in Europe. We will then examine the European Monetary System (EMS) and the EMU. Finally, we will analyze the economic and political implications of EMU for member states and the global monetary system.After the creation of the customs union and until the adoption of the EMS in 1978, members of the European Community (EC) experienced serious economic difficulties that threatened the future of economic integration. Whereas many scholars argue that this was a period of disintegration, we believe that this conclusion is misplaced (see Chapter 4 ). If disintegration was the order of this period, then how can one account for the creation of the EMS, which highlighted a process of trial and learning in exchange rate policy? Moreover, the European Regional Development Fund (ERDF) came into effect in 1975. As we will explain in Chapter 10 , this fund was crucial for the development of the underprivileged regions of the EC. Finally, the EC expanded to nine countries when Britain, Denmark, and Ireland became members in 1973.The economic difficulties experienced by the EC resulted from important changes in the international economic order. The collapse of the Bretton Woods monetary system represented the first serious shock to the EC and tested its seriousness in achieving economic integration. During the 1960s, there were important developments that weakened this monetary system. The weakening of the U.S. dollar strained the stability of European currencies: The West German government revalued the deutsche mark (DM) in 1961 and 1969, and the French government devalued the franc in 1969. These measures were intended to stabilize the U.S. dollar in international markets. However, they failed to eliminate exchange rate instability in the system and persuaded EC leaders that alternative policy options had to be considered for the EC. The policy recommendation came at the Hague summit of 1969, where the EC heads of state and government accepted Willy Brandt’s call for EMU. Subsequently, the Werner plan of 1970 laid down the basic idea for this monetary union.1
- Michele Fratianni, Jurgen Von Hagen(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
In 1978, German chancellor Helmut Schmidt and French president Valery Giscard d'Estaing embarked on a political tour de force for a new monetary arrangement, at the end of which the EC formed the EMS in December 1978 (Ludlow 1982). The EMS charter set its goals to be a greater measure of monetary stability, growth with stability, and convergence of economic development. But it is clear that the main objective was monetary stability. More than a decade later, it is fair to say that the EMS has surprised many merely for having survived this long. In fact, most conventional macroeconomists expected the EMS to fail for trying to forge high-inflation France and Italy into an exchange-rate arrangement with low-inflation Germany (Fratianni and von Hagen 1990a). After a period of stagnation in the early 1980s, the process of monetary union regained momentum with the Community's efforts to complete its internal market program, the Single European Market, or Europe 1992 program. At its Madrid summit in June 1989, the Council adopted the Delors Report (1989) as the official blueprint for monetary unification. Written by central bank representatives from all EC member states, the report represents the first formal acknowledgment of the goal of monetary union by all central banks in the EC. Like the Werner Report, the Delors Report proposes to build monetary union in three stages and outlines institutional arrangements for each step. 3 It dwells again on the rela-tionship between economic and monetary integration. In a compromise between the positions of the Marjolin and MacDougall reports and the political position of Jenkins (1978), it develops the concept of parallelism: monetary and economic integration are two aspects of the same process and must be pursued simultaneously. The report also deals with the role of fiscal policy in a monetary union, calling repeatedly for fiscal policy coordination and the imposition of binding restraints on members' budgetary policies.
eBook - PDFEuropean Responses to Globalization and Financial Market Integration
Perceptions of Economic and Monetary Union in Britain, France and Germany
- A. Verdun(Author)
- 2000(Publication Date)
- Palgrave Macmillan(Publisher)
A European Monetary Fund (EMF) would form the system’s central institution and take over from the EMCF after a two-year transitional period (BIS, 1979: 144). The less prosperous regions were reinsured that, by repeated studying of the economic situation, appropriate action could be taken to strengthen their economies. A last noteworthy new ele- ment of the EMS was a ‘divergence indicator’, which was created to provide some symmetry in the adjustment burden between appreciat- ing and depreciating currencies and an automatic mechanism to enforce consultations before the intervention limits were reached (Communiqué Bremen, 7–8 July 1978). In the following six months the EMS plan was worked out in techni- cal committees and in the Ecofin Council, and the European Monetary System was set up in December 1978. 57 All EEC Member States fully joined the EMS, except the UK which decided to keep the pound out of the Exchange Rate Mechanism (ERM). 58 The ‘scheme for the creation of closer monetary cooperation’ had a number of formal goals: to create a ‘zone of monetary stability in Europe’, ‘growth with stability’ 78 European Responses to Globalization and ‘convergence of economic development’. But it was obvious at the time, and even more so during the 1980s, that its main objective was to create a European Exchange Rate Mechanism, and to try to limit the influence of dollar disturbances on EEC economic and monetary policies. The EMS consisted of phases, as did the earlier EMU plan, and, fol- lowing a similar fate, the EMS failed to move to the next phase (see also Sumner and Zis, 1982). The start of the second stage was planned for 1981. In this stage the use of the ECU would have been extended, and an EMF would have been fully operating. However, the Member States could not agree on the powers to be given to the new institution. Again the international context did not facilitate matters.
- Johnny Laursen(Author)
- 2015(Publication Date)
- Nomos/Bloomsbury(Publisher)
But in contrast to Great Britain the Netherlands accepted the Franco-German lead-ership for political reasons but also because they shared the same economic philosophy of monetary stability with the Germans. This shows the ambiva-lence of Franco-German leadership in Europe. On the one hand it was im-portant for the success of the EMS on the other the other countries had to accept it. In the end, the European Monetary System rested on three pillars: The parity grid with the exchange rate mechanism fixing the bilateral relations between the European currencies with a fluctuation margin of 2.25% (Italy 6%) around the fixed parity. Determined intervention from two central banks at a time protected the participating currencies from greater exchange rate fluctuations. Secondly, a newly created currency, the ECU, was constructed as a divergence indicator defining the relative value of a currency in relation to the other EMS currencies. It was based on a currency basket from the participating countries and as a parallel currency besides the national money. It could, however, only be used as money in account, there were no notes and coins in ECU. The third element was a system of European credit fa-cilities in order to supply governments with balance of payment deficits the required credits. From a nowadays perspective, the EMS was an important step in the direction to monetary union even if the system faced some serious crisis in the 1990s. 58 F. van ESCH, ‘ The Rising of the Phoenix: Building the European Monetary System on a Meeting of Minds ‘ , in Eurosclerosis or Europeanisation? European Integration in the 1970s. L´Europe en Formation , no. 353-354, (2009), 133-148. The European Currency System and the European Policies of Helmut Schmidt 199 Conclusion What were the driving forces behind European monetary integration in the 1970s and the EMS in particular? A first important driving force was the operation of markets.
eBook - PDFThe European Central Bank
The New European Leviathan?
- D. Howarth, Kenneth A. Loparo, Peter Loedel(Authors)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
The governors sought a better balance between exchange-rate movements within the fluctuation margins, changes in interest-rate differentials and interventions. The French drive for EMS reform and the Genscher initiative Mitterrand’s March 1983 decision to keep the franc in the ERM made possible future developments in monetary integration. In 1985, Jacques Delors, as Commission president, (supported by the French) sought unsuccessfully to include mention of a European monetary authority in the Single European Act (SEA) (1986), although the goal of eventual EMU was incorporated into the Act’s preamble and the EMS and the ECU (described as the ‘European currency’) were brought into European Monetary Authority in the Prehistory of EMU 33 the scope of the treaties. Of potential significance for the future development of European monetary authority, the SEA applied the unanimity rule of Article 236a to any institutional development in the field of economic and monetary policy – which meant that it could be vetoed by the British government. The new French neo- Gaullist-led government of Jacques Chirac (1986–88) began actively pushing for a reinforced EMCF to promote the use of the ECU which was seen as a way to challenge the supremacy of the German mark (Balleix-Banerjee 1999; Howarth 2001). This was part of renewed French efforts to achieve greater symmetry within the EMS: to increase strong currency central bank support for weak currencies (notably increased and obligatory Bundesbank support for the franc, through increased interventions and co-ordinated interest rate changes). On a few occasions in 1987, in newspaper interviews and speeches in France, the neo-Gaullist finance minister, Edouard Balladur speculated on the possible eventual creation of a new European monetary authority, anticipating the most important issues discussed in the Delors Committee and during the intergovernmental negotiations on EMU in 1990 and 1991.
eBook - PDFThe Politics of Europe
Monetary Union and Class
- W. Bonefeld(Author)
- 2001(Publication Date)
- Palgrave Macmillan(Publisher)
Any suggestion that the exchange rates of the DM, the US dollar and the Yen be fixed, fails to see the structural reasons for the volatility of these rates. The single European currency, when it will have replaced the national currencies, will abolish monetary crises within the European Com- munity. But this result wil l abolish neither wider monetary crises nor unequal development within Europe. Crises are inherent in the capitali st system. Attempts to rid capitalism of them can only change their form of manifestation. The European monetary union and the single c urrency The previous discussion can now be used to inquire int o th e E uropean Monetary Union (EMU) . To this end it is necessary to begin with an analysis of the precursor of the EMU, the European Monetary System (EMS). The two basic features of the EMS were the Exclwnge Rate Mechanism, or ERM, and the European Cu"ency Unit, or Ecu. 20 The Ecu was a compos- ite currency in which all member states' currencies were represented in different quantities (weights). Through this fixed value relative to the Ecu, national currencies had a fixed value relative to each other. For example, according to the Financial Times of 7 March 1995, Ecu 1 was equal to Fl.2.152 and to FFr.6.406. These were the bilateral central rates against the Ecu or central rates for short. They implied that FL.2.152 = The Singlt> European Currency 47 FFr.6.406. Or, FFr.1 = 2.152/6.406F1 = Fl.0.3359 and Fl.l = 6.406/ 2.1S2FFr = FFr.2.976. These were the cross bilateral central rates, or cross rates for short. Up to 1992, t he member states under t ook to keep their currencies' fluctuations withi n relati ve ly narrow li mits- 2.25 per ce nt above or below the c ross rates (Italy was all owed a ± 6 per ce nt band but ado pted the ± 2. 25 per ce nt ba nd in 1990). These limits of flu ctuati ons were the bands or bilateral limit s.
- Norbert Horn(Author)
- 2011(Publication Date)
- De Gruyter(Publisher)
Chapter Two The Institutional and Legal Framework for the European Monetary Union (EMU) Norbert Horn I. The Treaty of Maastricht and Decisions for the EMU 1. The Decisions of 1992 and 1998 On February 7, 1992, the heads of state and government of the twelve Member States of the European Economic Community (EEC) convened in Maastricht, Netherlands, to sign the Treaty on the European Union 1 for the further develop-ment of the EEC, founded in 1957. The core of the Treaty of Maastricht are the provisions on the establishment of a European Economic and Monetary Union. The main goal and the main effect of this union are the introduction of a single European currency, the euro, and the establishment of a common European Sys-tem of Central Banks (ESCB). Thus, it is justified to speak simply of a European Monetary Union (EMU). On May 2, 1998, the heads of state and government of the eleven participating countries (i.e., Germany, France, Austria, the Netherlands, Belgium, Luxembourg, Finland, Ireland, Italy, Spain, and Portugal) decided to enter the third and decisive stage of the EMU, scheduled to start on January 1, 1999. Four of the fifteen mem-bers of the European Union remained outside: Great Britain, Sweden, and Den-mark did not wish to participate at that time; and Greece did not qualify for mem-bership. The decision to begin stage 3 of the EMU followed a procedure prescribed by the Treaty of Maastricht. The Treaty lays down a procedure for deciding which countries would be allowed to participate in the single currency (Art. 109j, para. 4 ECT 2 ). The E.U. Commission and the European Monetary Institute (EMI) had to 1 Hereafter referred to as the Treaty of Maastricht. 2 Citations to ECT refer to the Treaty Establishing the European Community, as incorporated by the Treaty of Maastricht in Title II, Art. G.
eBook - PDFEuropean Union Law
Text and Materials
- Damian Chalmers, Gareth Davies, Giorgio Monti(Authors)
- 2014(Publication Date)
- Cambridge University Press(Publisher)
128 By contrast, the ECB competences appear modest. It can establish ‘relations with central banks and financial institutions in other countries and, where appropriate, with international organisa- tions’. 129 It is also responsible for the management of the revamped exchange rate mechanism (ERM II), which was introduced in January 1999 to link other Member State currencies to the 733 Economic and Monetary Union 130 Resolution of the European Council on the establishment of an exchange-rate mechanism in the third stage of economic and monetary union [1997] OJ C236/5. See K. Rohde Jensen, ‘Inside EU, Outside EMU: Institutional and Legal Aspects of the Exchange Rate Mechanism II’ in ECB, Legal Aspects of the European System of Central Banks: Liber Amicorum Paolo Zamboni Garavelli (Frankfurt, ECB, 2005). 131 Agreement of 16 March 2006 between the ECB and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union (EMU) [2006] OJ C73/9. 132 Protocol on the Statute of the ESCB, Article 19. 133 Protocol on the Statute of the ESCB, Article 22. 134 Regulation 2157/1999 on the powers of the ECB to impose sanctions [1999] OJ L264/21. 135 Article 127(6) TFEU. 136 See n. 64 above. euro. 130 Participation in ERM II is voluntary for the non-euro area Member States, and, as of January 2014, only two currencies (the Danish krone and Lithuanian litas) participate in it. For each participating currency, a central rate of exchange is set against the euro. The actual ex- change rate fluctuates within a band set at +/-2 per cent for the krone and +/-15 per cent for the litas around the central rate. An agreement between the European Central Bank (ECB) and the non-euro area NCBs demands intervention by these to keep the actual rates within the bands at all times. 131 (b) Prudential supervision The Treaties grant limited direct regulatory powers to the ECB.
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