European Monetary System

European Monetary System,

arrangement by which most nations of the European Union (EU) linked their currencies to prevent large fluctuations relative to one another. It was organized in 1979 to stabilize foreign exchange and counter inflation among members. The European Currency Unit (ECU), which also was established in 1979, was the forerunner of the euro. Derived from a basket of varying amounts of the currencies of the EU nations, the ECU was a unit of accounting used to determine exchange rates among the national currencies. 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.

In 1994 the European Monetary Institute was created as transitional step in establishing the European Central Bank (ECB) and a common currency (the euro). The ECB, which was established in 1998 and has its headquarters in Frankfurt, Germany, is an official institution of the EU and is responsible for setting a single monetary policy and interest rate for the eurozone nations, in conjunction with their national central banks. Like the U.S. Federal Reserve, it is charged with controlling inflation; unlike the Federal Reserve, it is not also mandated with promoting employment. Also, unlike most central banks, it does not function as a lender of last resort for the eurozone governments. Late in 1998, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain cut their interest rates to a nearly uniformly low level in an effort to promote growth and to prepare the way for a unified currency.

At the beginning of 1999, the same EU members adopted a single currency, the euro, for foreign exchange and electronic payments. (Greece, which did not meet the economic conditions required until 2000, adopted the euro in 2001.) The introduction of the euro four decades after the beginings of the European Union was widely regarded as a major step toward European political unity. By creating a common economic policy, the nations acted to put a damper on excessive public spending, reduce debt, and make a strong attempt at taming inflation. Euro coins and notes began circulating in Jan., 2002, and local currencies were no longer accepted as legal tender two months later. Of the EU members admitted since 2004, seven—Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014), and Lithuania (2015)—have since adopted the euro.

Of the European Union members—Denmark, Great Britain, and Sweden—that did not adopt the euro when it was introduced perhaps the most notable is Britain, which continued to regard itself as more or less separate from Europe and in 2016 voted in a referendum to leave the EU, but in all three nations there was strong public anxiety that dropping their respective national currencies would give up too much independence. Danish voters rejected adoption of the euro in a referendum in 2000; the vote was seen as strengthening euro opponents in Britain and Sweden.

The budget-deficit ceilings established in the process of introducing the euro have been violated by a number of countries since 2001, in part because of national government measures to stimulate economic growth. In 2003, EU finance ministers, faced with the fact that economic downturns had put France and Germany in violation of the ceilings, temporarily suspended the pact. The European Commission challenged that move, however, and the EU high court annulled the finance ministers' decision in 2004.

The global financial crisis of 2008–9 revealed by 2010 a number difficulties in the common monetary system. In the crisis and its aftermath nations could not resort to expanded government deficits as a means to revive their economies; instead, soaring deficits forced significant recessionary government austerities on Greece, Ireland, Spain, Portugal, and other nations. Lacking national currencies, these nations also could not resort to devaluationdevaluation,
decreasing the value of one nation's currency relative to gold or the currencies of other nations. It is usually undertaken as a means of correcting a deficit in the balance of payments.
..... Click the link for more information. . The budget shortall and government debt in Greece in particular strained the monetary union and the stability of the euro as eurozone nations (Germany especially) agreed only with difficulty on measures designed to assist Greece and support the euro. The delay in acting contributed to an increase in the cost of aiding Greece, and forced EU nations, along with the International Monetary Fund, to pledge $950 billion in loan guarantees and other measures to aid financially troubled eurozone nations and support the euro. Ireland and Portugal also ultimately were forced to seek international financial assistance. In Dec., 2010, EU nations agreed to establish the European Stability Mechanism (ESM), a permanent fund to aid financially troubled member nations that came into being in Oct., 2012.

As the eurozone financial crisis continued into 2011, threatening Spain and Italy as well, EU governments agreed to strengthen the powers and increase the aid funds and to additional efforts, including significant losses on Greek debt, to stabilize Greek finances. In Dec., 2011, an EU accord was reached (with Britain as the only clear nonparticipant) to more strictly enforce the deficit and debt ceilings required of eurozone and other EU members through national constitutional amendments and EU sanctions. The agreement was codified in a treaty signed in Mar., 2012, by all EU nations except Britain and the Czech Republic; later that month, the amount of funds available to aid troubled nations was increased. Spain and Cyprus subsequently announced plans to seek international financial assistance. In July, 2012, EU nations agreed to establish a financial supervisory authority under the ECB to oversee the eurozone's largest banks and also to allow bailout aid directly to those banks (instead of to them through their national governments) once the oversight body was created.

By mid-2013 the ongoing eurozone crisis had produced prolonged recession and record average unemployment in the region (and extremely high unemployment in Greece and Spain). In 2014 the threat of deflation and resurgent recession led the ECB to adopt additional measures designed to encourage lending and reduce the value of the euro; these measures continued through 2017. The ECB subsequently began to emphasize the need to tackle high unemployment and improve economic competitiveness in the eurozone nations. Greece's persistent economic problems and its new government's desire for the easing of bailout conditions led to a new crisis in mid-2015 and to the demand by Germany and other eurozone nations for greater austerities and changes in Greece. The crisis also undermined the sense of common European purpose and exposed divisions within the EU.

Bibliography

See H. James, Making the European Monetary Union (2012); M. K. Brunnermeier et al., The Euro and the Battle of Ideas (2016); J. Stiglitz, The Euro: How a Common Currency Threatens the Future of Europe (2016).

European Monetary System

European Monetary System (EMS)

A system adopted by European Community members with the aim of promoting stability by limiting exchange-rate fluctuations. The system was originated in 1979 by the nine members of the European Community (EC). The EMS comprised three principal elements: the European Currency Unit (ECU), the monetary unit used in EC transactions; the Exchange Rate Mechanism, ERM, whereby those member states taking part agreed to maintain currency fluctuations within certain agreed limits; and the European Monetary Cooperation Fund, which issues the ECU and oversees the ERM. The 1992 Maastricht Treaty provided for the move to Economic and Monetary Union (EMU), including a European Monetary Institute to coordinate the economic and monetary policy of the EU, a European Central Bank (ECB) to govern these policies, and the presentation of a single European currency.

European Monetary System

A system established in 1979 whereby most member states of the European Economic Community linked their currencies to each other in anticipation of monetary integration. The first stage of the EMS was the European currency unit, then the ERM I, and, finally, the introduction of the euro and the ERM II. The European Monetary System also called for greater extension of credit between European countries. Among the methods the EMS used included the relative synchronization of national interest rates.

European Monetary System (EMS)

the former institutional arrangement, established in 1979, for coordinating and stabilizing the EXCHANGE RATES of member countries of the EUROPEAN UNION.

The EMS was replaced in January 1999 by the exchange rate arrangements of the ECONOMIC AND MONETARY UNION (EMU).

The EMS was based on a FIXED EXCHANGE RATE system and the European Currency Unit (ECU), which was used to value, on a common basis, exchange rates and which also acted as a reserve asset to be used by members, alongside their other INTERNATIONAL RESERVE holdings, to settle payments imbalances between themselves.

European Monetary System (EMS)

the former institutional arrangement, established in 1979, for coordinating and stabilizing the EXCHANGE RATES of member countries of the EUROPEAN UNION (EU). The EMS was replaced in January 1999 by the exchange rate arrangements of the ECONOMIC AND MONETARY UNION.

The EMS was based on a FIXED EXCHANGE RATE mechanism and the EUROPEAN CURRENCY UNIT (ECU), which was used to value, on a common basis, exchange rates and which also acted as a reserve asset that members could use, alongside their other INTERNATIONAL RESERVE holdings, to settle payment imbalances between themselves. The EMS was managed by the European Monetary Cooperation Fund (EMCF).

Under the EMS ‘exchange rate mechanism’ (ERM), each country's currency was given a fixed central par value specified in terms of the ECU, and the exchange rate between currencies could move to a limited degree around these par values, being controlled by a ‘parity grid’ and ‘divergence indicator’. The parity grid originally permitted a currency to move up to a limit of 2.25% either side of its central rate. As a currency moved towards its outer limit, the divergence indicator came into play requiring the country's central bank to intervene in the foreign exchange market or adopt appropriate domestic measures (e.g. alter interest rates) in order to stabilize the rate. If in the view of the EMCF the central rate itself appeared to be overvalued or undervalued against other currencies, a country could devalue (see DEVALUATION or revalue (see REVALUATION) its currency refixing it at a new central parity rate.

The European Currency Unit, unlike other reserve assets such as GOLD, had no tangible life of its own. ECUs were ‘created’ by the Fund in exchange for the inpayment of gold and other reserve assets and took the form of book-keeping entries recorded in a special account managed by the Fund. The value of the ECU was based on a weighted ‘basket’ of members’ currencies.

Initially, the UK declined to join the Exchange Rate Mechanism (ERM) but did so eventually in October 1990, establishing a central rate against the German DM (the leading currency in the ERM) of £1 = 2.95 DM. The UK withdrew from the ERM in September 1992 after prolonged speculation against the pound had pushed it down to its ‘floor’ limit of 2.77 DM, rejecting the devaluation option within the ERM in favour of a market-driven ‘floating’ of the currency (see FLOATING EXCHANGE RATE SYSTEM). In August 1993, after the French franc came under pressure, ERM currency bands were widened to 15%. These episodes, together with the earlier withdrawal of the Italian lira from the ERM, illustrate one of the major drawbacks of a fixed exchange rate system, namely, the tendency for ‘pegged’ rates to get out of line with underlying market tendencies, so fuelling excessive speculation against weak currencies.

单词	european monetary system
释义	European Monetary System European Monetary System n (Banking & Finance) the system used in the European Union for stabilizing exchange rates between the currencies of member states and financing the balance-of-payments support mechanism. The original Exchange Rate Mechanism was formed in 1979 but superseded in 1999 when the euro was adopted as official currency of 11 EU member states. A new exchange rate mechanism (ERM II) based on the euro is used to regulate the currencies of participating states that have not adopted the euro. Abbreviation: EMS European Monetary System A financial system used to stabilize exchange rates between currencies of member states. European Monetary System European Monetary System, arrangement by which most nations of the European Union (EU) linked their currencies to prevent large fluctuations relative to one another. It was organized in 1979 to stabilize foreign exchange and counter inflation among members. The European Currency Unit (ECU), which also was established in 1979, was the forerunner of the euro. Derived from a basket of varying amounts of the currencies of the EU nations, the ECU was a unit of accounting used to determine exchange rates among the national currencies. 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. In 1994 the European Monetary Institute was created as transitional step in establishing the European Central Bank (ECB) and a common currency (the euro). The ECB, which was established in 1998 and has its headquarters in Frankfurt, Germany, is an official institution of the EU and is responsible for setting a single monetary policy and interest rate for the eurozone nations, in conjunction with their national central banks. Like the U.S. Federal Reserve, it is charged with controlling inflation; unlike the Federal Reserve, it is not also mandated with promoting employment. Also, unlike most central banks, it does not function as a lender of last resort for the eurozone governments. Late in 1998, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain cut their interest rates to a nearly uniformly low level in an effort to promote growth and to prepare the way for a unified currency. At the beginning of 1999, the same EU members adopted a single currency, the euro, for foreign exchange and electronic payments. (Greece, which did not meet the economic conditions required until 2000, adopted the euro in 2001.) The introduction of the euro four decades after the beginings of the European Union was widely regarded as a major step toward European political unity. By creating a common economic policy, the nations acted to put a damper on excessive public spending, reduce debt, and make a strong attempt at taming inflation. Euro coins and notes began circulating in Jan., 2002, and local currencies were no longer accepted as legal tender two months later. Of the EU members admitted since 2004, seven—Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014), and Lithuania (2015)—have since adopted the euro. Of the European Union members—Denmark, Great Britain, and Sweden—that did not adopt the euro when it was introduced perhaps the most notable is Britain, which continued to regard itself as more or less separate from Europe and in 2016 voted in a referendum to leave the EU, but in all three nations there was strong public anxiety that dropping their respective national currencies would give up too much independence. Danish voters rejected adoption of the euro in a referendum in 2000; the vote was seen as strengthening euro opponents in Britain and Sweden. The budget-deficit ceilings established in the process of introducing the euro have been violated by a number of countries since 2001, in part because of national government measures to stimulate economic growth. In 2003, EU finance ministers, faced with the fact that economic downturns had put France and Germany in violation of the ceilings, temporarily suspended the pact. The European Commission challenged that move, however, and the EU high court annulled the finance ministers' decision in 2004. The global financial crisis of 2008–9 revealed by 2010 a number difficulties in the common monetary system. In the crisis and its aftermath nations could not resort to expanded government deficits as a means to revive their economies; instead, soaring deficits forced significant recessionary government austerities on Greece, Ireland, Spain, Portugal, and other nations. Lacking national currencies, these nations also could not resort to devaluationdevaluation, decreasing the value of one nation's currency relative to gold or the currencies of other nations. It is usually undertaken as a means of correcting a deficit in the balance of payments. ..... Click the link for more information. . The budget shortall and government debt in Greece in particular strained the monetary union and the stability of the euro as eurozone nations (Germany especially) agreed only with difficulty on measures designed to assist Greece and support the euro. The delay in acting contributed to an increase in the cost of aiding Greece, and forced EU nations, along with the International Monetary Fund, to pledge $950 billion in loan guarantees and other measures to aid financially troubled eurozone nations and support the euro. Ireland and Portugal also ultimately were forced to seek international financial assistance. In Dec., 2010, EU nations agreed to establish the European Stability Mechanism (ESM), a permanent fund to aid financially troubled member nations that came into being in Oct., 2012. As the eurozone financial crisis continued into 2011, threatening Spain and Italy as well, EU governments agreed to strengthen the powers and increase the aid funds and to additional efforts, including significant losses on Greek debt, to stabilize Greek finances. In Dec., 2011, an EU accord was reached (with Britain as the only clear nonparticipant) to more strictly enforce the deficit and debt ceilings required of eurozone and other EU members through national constitutional amendments and EU sanctions. The agreement was codified in a treaty signed in Mar., 2012, by all EU nations except Britain and the Czech Republic; later that month, the amount of funds available to aid troubled nations was increased. Spain and Cyprus subsequently announced plans to seek international financial assistance. In July, 2012, EU nations agreed to establish a financial supervisory authority under the ECB to oversee the eurozone's largest banks and also to allow bailout aid directly to those banks (instead of to them through their national governments) once the oversight body was created. By mid-2013 the ongoing eurozone crisis had produced prolonged recession and record average unemployment in the region (and extremely high unemployment in Greece and Spain). In 2014 the threat of deflation and resurgent recession led the ECB to adopt additional measures designed to encourage lending and reduce the value of the euro; these measures continued through 2017. The ECB subsequently began to emphasize the need to tackle high unemployment and improve economic competitiveness in the eurozone nations. Greece's persistent economic problems and its new government's desire for the easing of bailout conditions led to a new crisis in mid-2015 and to the demand by Germany and other eurozone nations for greater austerities and changes in Greece. The crisis also undermined the sense of common European purpose and exposed divisions within the EU. Bibliography See H. James, Making the European Monetary Union (2012); M. K. Brunnermeier et al., The Euro and the Battle of Ideas (2016); J. Stiglitz, The Euro: How a Common Currency Threatens the Future of Europe (2016). European Monetary System European Monetary System (EMS) a European monetary unit, an exchange rate intervention mechanism and a transfer mechanism established in 1978 under the law of the European Communities. It is this system that established the European Currency Unit (ECU), a currency used to settle transactions between Community authorities and for operating the other mechanisms of the system. Developments in 1997 saw a second exchange rate mechanism for co-ordinating the EURO with remaining national currencies. On 1 January 2002 the euro became the legal tender of the participating countries. European Monetary System European Monetary System (EMS) A system adopted by European Community members with the aim of promoting stability by limiting exchange-rate fluctuations. The system was originated in 1979 by the nine members of the European Community (EC). The EMS comprised three principal elements: the European Currency Unit (ECU), the monetary unit used in EC transactions; the Exchange Rate Mechanism, ERM, whereby those member states taking part agreed to maintain currency fluctuations within certain agreed limits; and the European Monetary Cooperation Fund, which issues the ECU and oversees the ERM. The 1992 Maastricht Treaty provided for the move to Economic and Monetary Union (EMU), including a European Monetary Institute to coordinate the economic and monetary policy of the EU, a European Central Bank (ECB) to govern these policies, and the presentation of a single European currency. European Monetary System A system established in 1979 whereby most member states of the European Economic Community linked their currencies to each other in anticipation of monetary integration. The first stage of the EMS was the European currency unit, then the ERM I, and, finally, the introduction of the euro and the ERM II. The European Monetary System also called for greater extension of credit between European countries. Among the methods the EMS used included the relative synchronization of national interest rates. European Monetary System (EMS) the former institutional arrangement, established in 1979, for coordinating and stabilizing the EXCHANGE RATES of member countries of the EUROPEAN UNION. The EMS was replaced in January 1999 by the exchange rate arrangements of the ECONOMIC AND MONETARY UNION (EMU). The EMS was based on a FIXED EXCHANGE RATE system and the European Currency Unit (ECU), which was used to value, on a common basis, exchange rates and which also acted as a reserve asset to be used by members, alongside their other INTERNATIONAL RESERVE holdings, to settle payments imbalances between themselves. European Monetary System (EMS) the former institutional arrangement, established in 1979, for coordinating and stabilizing the EXCHANGE RATES of member countries of the EUROPEAN UNION (EU). The EMS was replaced in January 1999 by the exchange rate arrangements of the ECONOMIC AND MONETARY UNION. The EMS was based on a FIXED EXCHANGE RATE mechanism and the EUROPEAN CURRENCY UNIT (ECU), which was used to value, on a common basis, exchange rates and which also acted as a reserve asset that members could use, alongside their other INTERNATIONAL RESERVE holdings, to settle payment imbalances between themselves. The EMS was managed by the European Monetary Cooperation Fund (EMCF). Under the EMS ‘exchange rate mechanism’ (ERM), each country's currency was given a fixed central par value specified in terms of the ECU, and the exchange rate between currencies could move to a limited degree around these par values, being controlled by a ‘parity grid’ and ‘divergence indicator’. The parity grid originally permitted a currency to move up to a limit of 2.25% either side of its central rate. As a currency moved towards its outer limit, the divergence indicator came into play requiring the country's central bank to intervene in the foreign exchange market or adopt appropriate domestic measures (e.g. alter interest rates) in order to stabilize the rate. If in the view of the EMCF the central rate itself appeared to be overvalued or undervalued against other currencies, a country could devalue (see DEVALUATION or revalue (see REVALUATION) its currency refixing it at a new central parity rate. The European Currency Unit, unlike other reserve assets such as GOLD, had no tangible life of its own. ECUs were ‘created’ by the Fund in exchange for the inpayment of gold and other reserve assets and took the form of book-keeping entries recorded in a special account managed by the Fund. The value of the ECU was based on a weighted ‘basket’ of members’ currencies. Initially, the UK declined to join the Exchange Rate Mechanism (ERM) but did so eventually in October 1990, establishing a central rate against the German DM (the leading currency in the ERM) of £1 = 2.95 DM. The UK withdrew from the ERM in September 1992 after prolonged speculation against the pound had pushed it down to its ‘floor’ limit of 2.77 DM, rejecting the devaluation option within the ERM in favour of a market-driven ‘floating’ of the currency (see FLOATING EXCHANGE RATE SYSTEM). In August 1993, after the French franc came under pressure, ERM currency bands were widened to 15%. These episodes, together with the earlier withdrawal of the Italian lira from the ERM, illustrate one of the major drawbacks of a fixed exchange rate system, namely, the tendency for ‘pegged’ rates to get out of line with underlying market tendencies, so fuelling excessive speculation against weak currencies. AcronymsSeeEMSThesaurusSeeeuro
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