What is the European Monetary System

The European Monetary System I

Fixed but adaptable exchange rates in EMS I

The European Monetary System I (EMS I) was a system of fixed but adjustable exchange rates between the currencies of certain EU member states. It has since been further developed into EWS II.

The European Monetary System I was founded in 1979 as the successor to the European Exchange Rate Union. It should create a zone of stable currencies that is largely free of profound exchange rate fluctuations. The European Monetary System I consisted of three elements:

- an exchange rate and intervention mechanism,
- a comprehensive financial assistance system,
- the European Currency Unit (ECU) as a reference value and unit of account.

In the European Monetary System I, the agreed exchange rates of the participating states were only allowed to fluctuate upwards or downwards within a "range" of 2.25 percent.

In August 1993 the bandwidths were increased to 15 percent upwards and downwards. If a currency came under pressure and its exchange rate approached the limit of the range, the central banks involved intervened: They bought the weak currency and sold the strong one to support the rate. This part of the EMS I agreements was called the exchange rate and intervention mechanism.


ECU

The ECU (European Currency Unit) was introduced on January 1, 1979 as the arithmetical reference value of the European Monetary System I. Until the start of monetary union, it served as:

- reference value in the exchange rate mechanism,
- calculation variable in financial operations,
- Means of payment and reserve instruments between the EMS central banks.

It has also been used as a unit of account in the framework of Community policies. The private money and capital markets also made use of the ECU for lending and banking. Internationally operating companies use them for internal billing purposes.

The ECU was not an independent currency, but a "currency basket": In a certain ratio, shares of all currencies involved were brought into this currency basket.

The value of the ECU in the respective national currency resulted from the value of the currency shares involved in this currency. One ECU was the sum of:

0.6242 German marks
1.332 French Francs
0.08784 pounds sterling
151.8 Italian lira
0.2198 Dutch guilders
6,885 Spanish pesetas
3.301 Belgian Franc
0.1976 Danish kroner
0.008552 Irish pounds
1,393 Portuguese. Escudos
1.44 Greek Drachmas
0.13 Luxembourg franc

The ECU monetary policy was not determined by one, but by all central banks involved: the ECU was not a currency in the traditional sense. With the beginning of the third stage of European Economic and Monetary Union on January 1, 1999, the ECU was replaced by the euro at a ratio of 1: 1.



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