European Monetary SystemA

8/8/2019 European Monetary SystemA

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European MonetaryEuropean MonetarySystemSystem

Presented byPresented by--

Ankur MahteAnkur Mahte

Pushpendra SinghPushpendra Singh


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IntroductionIntroduction

-- Breton woods failureBreton woods failure

-- Stable Exchange rate needStable Exchange rate need

-- European MonetarySystemEuropean MonetarySystem (EMS) was an(EMS) was anarrangement established in 1979.arrangement established in 1979.

-- Jenkins European Commission.Jenkins European Commission.

-- European Economic Community(EEC) linkedEuropean Economic Community(EEC) linkedtheirtheir currenciescurrencies to prevent large fluctuations relative toto prevent large fluctuations relative toone another.one another.


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How doesthe EuropeanHow doesthe EuropeanMonetarySystem workMonetarySystem work

The European currency unit(ECU).The European currency unit(ECU).

AnAn Exchange Rate MechanismExchange Rate Mechanism (ERM).(ERM).

TheThe European Monetary CooperationEuropean Monetary CooperationFund.Fund.


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EuropeancurrencyunitEuropeancurrencyunit

SymbolSymbol--The currency's symbol,The currency's symbol, ,comprises an,comprises aninterlaced C and E, which are the initial letters of theinterlaced C and E, which are the initial letters of thephrase 'European Community' in manyphrase 'European Community' in many EuropeanEuropeanlanguages.languages.

TheThe European Currency UnitEuropean Currency Unit was a basket of thewas a basket of thecurrencies of thecurrencies of the European CommunityEuropean Community member states,member states,used as theused as the unit of accountunit of account of the European Community.of the European Community.

Replaced by theReplaced by the euroeuro on January 1, 1999,on January 1, 1999,at the valueat the value1 = 1 ECU1 = 1 ECU


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CONTD..CONTD..

The ECU itself replaced theThe ECU itself replaced the European Unit ofEuropean Unit ofAccount, on March 13, 1979.Account, on March 13, 1979.

TheThe European Exchange RateEuropean Exchange RateMechanismMechanism attempted to minimize fluctuationsattempted to minimize fluctuationsbetween member state currencies and the ECU .between member state currencies and the ECU .

It had theIt had the ISO 4217 currency code .ISO 4217 currency code .

LegalimplicationsLegalimplications


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Exchange Rate MechanismExchange Rate Mechanism

TheThe European Exchange Rate MechanismEuropean Exchange Rate Mechanism,, ERMERM,,was a system introduced by thewas a system introduced by the European CommunityEuropean Community ininMarch 1979, as part of the European MonetaryMarch 1979, as part of the European MonetarySystemSystem (EMS), to reduce(EMS), to reduce exchange rate variability andexchange rate variability and

the introduction of athe introduction of a single currency.single currency.

Intent andoperationof the ERMIntent andoperationof the ERM-- 2.25% on either2.25% on eitherside of the bilateral ratesside of the bilateral rates

Replacement withthe euro and ERM IIReplacement withthe euro and ERM II--On 31On 31December 1998, the European Currency UnitDecember 1998, the European Currency Unit(ECU)(ECU) exchange rates of theexchange rates of the Euro zoneEuro zone countries werecountries werefrozen and the value of thefrozen and the value of the euro, was thuseuro, was thusestablished.In 1999, ERM II replaced the original ERM.established.In 1999, ERM II replaced the original ERM.


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TheThe European MonetaryEuropean Monetary

Cooperation FundCooperation Fund TheThe European Monetary Cooperation FundEuropean Monetary Cooperation Fund ((EMCFEMCF))

is an institution and a fund established in 1973 byis an institution and a fund established in 1973 bymembers of the Exchange Rate Mechanism (ERM) ofmembers of the Exchange Rate Mechanism (ERM) of

thethe European UnionEuropean Union to stabilize exchange rates.to stabilize exchange rates. It is nowIt is nowpart of thepart of the European Central Bank.European Central Bank.

FUNCTIONSFUNCTIONS--

-- Proper functioning of the Community ExchangeProper functioning of the Community ExchangeSystemSystem

-- Multilateralization within the CommunityMultilateralization within the Communityregarding settlements among membersregarding settlements among members


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The Crisis Of The EuropeanThe Crisis Of The EuropeanMonetarySystemMonetarySystem

The loss of control overThe loss of control over monetarymonetary policy by apolicy by abloc of countries operating a fixed exchange ratebloc of countries operating a fixed exchange rate

system would not be fatal during normal times,system would not be fatal during normal times,when the bloc's interest rates close to those thatwhen the bloc's interest rates close to those thatwould be desirable for the individual countries.would be desirable for the individual countries.

That is exactly what happened in 1989 to 1993That is exactly what happened in 1989 to 1993and this divergence almost destroyed theand this divergence almost destroyed theEuropean Monetary SystemEuropean Monetary System..


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Advantagesof commoncurrencyAdvantagesof commoncurrencyin Europein Europe

Introducing the common currency leads to gainsIntroducing the common currency leads to gainsin economic efficiency. These gains can bein economic efficiency. These gains can bedivided into two groups. One is the eliminationdivided into two groups. One is the elimination

of transaction cost and the other is theof transaction cost and the other is theelimination of risk which comes from uncertainelimination of risk which comes from uncertainfluctuation of the exchange rates.fluctuation of the exchange rates.

Disappearance of transaction costs and priceDisappearance of transaction costs and pricetransparency makes the common financialtransparency makes the common financialmarket in Europe deeper and more integrated.market in Europe deeper and more integrated.


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Disadvantagesof commonDisadvantagesof common

currencyin Europecurrencyin Europe There are two most important costsThere are two most important costs

-- One is a cost of institutions and individualsOne is a cost of institutions and individualsadjustment to a new currency.adjustment to a new currency.

-- The other is a lack of national monetaryThe other is a lack of national monetary

policy as a important tool for a memberpolicy as a important tool for a memberstate to adjust to the economicstate to adjust to the economicequilibrium when it experiences anequilibrium when it experiences aneconomic shock.economic shock.


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CONCLUSIONCONCLUSION

The EMS confirmed the importance of theThe EMS confirmed the importance of thecollective discipline framework which it helped tocollective discipline framework which it helped toestablish.establish.

By obliging the countries, which were party to it,By obliging the countries, which were party to it,to comply with an explicit exchange rateto comply with an explicit exchange ratediscipline, it made a decisive contribution in thediscipline, it made a decisive contribution in thefight against inflation.fight against inflation.

The lesson gained by the EMS was thatThe lesson gained by the EMS was thatmonetary organisation was useful, but neededmonetary organisation was useful, but needed

better mechanisms.better mechanisms.


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THANKSTHANKS

European Monetary SystemA

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