European Monetary System
The latest in the
series of monetary arrangements over the years in the European Community
(EC). The European monetary
system (EMS) officially came into effect on March 13, 1979.
The participating European countries were the following:
(The United Kingdom
is a member of the EMS, but does not participate in the intervention arrangements.)
The aim of the agreement
creating the EMS was to foster "closer monetary cooperation leading to
a zone of monetary stability in Europe.
The agreement consists
principally in an intervention requirement on the part of each participant
to limit exchange rate fluctuations, by the creation of the ECU (European
currency unit, a "basket" of all ten EC currencies) as the center of the
system, and by the enlargement of credit facilities already established
in the EC.
mechanism requires that the member nations intervene the foreign exchange
markets to prevent movements greater than 2.25% around parity in bilateral
rates between participants. Participating
countries whose rates were previously floating against other participants'
currencies are permitted to have movements in their bilateral rates of
up to 6% around parity. Italy
decided to make use of this option.
There exists also
a presumption that a participating country will take action when the value
of its currency in terms of the ECU diverges from its central rate by
more than a uniform percentage, the precise percentage for each country
being adjusted to take account of the weight of its currency in the "basket."
Unlimited very short-term
credit for intervention purposes continued in the same form as in the
original snake arrangement, except that such credit can be extended for
a somewhat longer period than before.
An initial supply of ECUs was issued by the European Monetary Cooperation
Fund against deposits of 20% of both the gold and dollar reserves of participating
countries. These ECUs were
to be used for the settlement of such intervention debts in accordance
with agreed rules. The short-term
and medium-term facilities of the EC were substantially enlarged, and
credit under the short-term facility can now also be granted over longer
periods. It is envisaged
that ultimately all the credit facilities under the EMS will be consolidated
in a European monetary fund (not to be confused with the erstwhile European
fund of the EUROPEAN MONETARY AGREEMENT).
In addition to contributing
to increased integration within the EC area, the principal objective of
the EMS is to promote internal financial stability.
Participating countries in the earlier European common market arrangement,
particularly those with small, open economies, have argued that the exchange
rate stability gained through that arrangement has assisted their domestic
economic policies and strengthened their foreign sectors.
The economies of those countries that previously allowed their
rates to float but are now joining the arrangement have in the past followed
a different path from those of the "snake" countries in response to differing
circumstances and policies. It is expected by the participants that the greater exchange
rate stability gained by more concerted intervention policies will facilitate
the task of harmonizing financial policies.
In view of the International
Monetary Fund, these initiatives raise the question of what would be the
requirements for a system in which exchange rate fluctuations were reduced
and the rate changes that did occur were more consistently in line with
long-term underlying trends. Such
a system requires orderly underlying economic and financial conditions
in member countries. Such
conditions imply, inter alia, a closer approximation to reasonable price
stability in member countries and a strong commitment by member governments
to avoid future departures from price stability.
In an environment of this kind expectations could be stabilizing
rather than destabilizing. "The
world is clearly still a long way from a system of that inflation not
only leads to instability but also over the longer run adversely affects
growth and employment opportunities constitutes an important first step
on the road to a more stable international monetary system."
In June 1985, the
European Council, composed of the heads of state and government of the
EC countries, proposed certain reforms that included a specific timetable
for the progressive liberalization of capital movements within the EC
with a view to furthering convergence of economic policies within the
EMS. According to this proposal,
all capital transactions will be liberalized by 1992.