European Monetary System (EMS)
Système monétaire européen (SME)
Europäisches Währungssystem (EWS)
Sistema Monetario Europeo (SME)
Europees Monetair System (EMS)
Europaeisk Monetaer System (EMS)
13 Mar 1979, Brussels (Belgium), on signature of an agreement by central banks of member countries of European Community, pursuant to a resolution adopted by the Council of the European Communities - currently Council of the European Union - on 5 Dec 1978, Brussels, and following preparatory work carried out by study groups of European Communities (EC), following the the Community Summit Meeting, 1-2 Dec 1969, The Hague (Netherlands). Operating procedures were finalized by Committee of Governors of the Central Banks of the Member States of the European Economic Community - which had previously been the institutional framework for administration in all aspects which fell within the competence of participating central banks - and the Board of Governors of European Monetary Cooperation Fund (EMCF), set up 3 Apr 1973.
Treaty on the Functioning of the European Union (TFEU), in force 1 Jan 1958, had stated that the Community shall have as its task, by establishing an economic and monetary union, to promote throughout the Community a harmonious and balanced development of economic activities. Single European Act (SEA) - signed Feb 1986, ratified by member parliaments by 31 Mar 1987 and came into force 1 July 1987 - modified the Treaty of Rome (Italy) and included an affirmation of the will to build European Economic and Monetary Union (EMU). The first phase of this Union came into force on 1 July 1990, involving removal of most remaining restrictions on capital movements, increased coordination of individual economic policies and more intensive cooperation between central banks. A priority objective of the European Union (EU), set up under the Maastricht Treaty after many years of planning, is the strengthening of the EMS and mobilization of necessary resources. Progress already made in this direction had been approval by Ministers of Finance, 13 June 1988, Luxembourg, of a directive aimed at free circulation of capital in all countries of the Community (with the exception of Spain, Ireland, Portugal and Greece) by 30 June 1990. This came into effect on 1 July 1990. Spain, Ireland, Portugal and Greece had until 31 Dec 1992 to phase out foreign exchange controls, with certain restrictions on capital movements being allowed Portugal and Greece for a further 3 years should they experience balance of payment difficulties. The Treaty on European Union (Maastricht Treaty), signed 7 Feb 1992, planned progress towards EMU and led to the setting up, 1 Jan 1994, of European Monetary Institute (EMI) to monitor functioning of the EMS and, 1 June 1998, of European Central Bank (ECB) which replaced the EMI.
A Resolution of the European Council, 16 June 1997, Amsterdam (Netherlands), established an exchange-rate mechanism in the third stage of EMU, and agreement of 1 Sep 1998 between the European Central Bank and the National Central Banks (NCBs) of member states outside the euro area laid down operating procedures. Under the European Council resolution, a new 'Exchange-Rate Mechanism (ERM II)' replaced the European Monetary System as from 1 Jan 1999, when Economic and Monetary Union became official and the EMS became obsolete; at that time the 'euro' became currency of 11 of the EU member states, followed by a 12th, Greece, on 1 Jan 2001. As from 1 Jan 2002, banks in these countries issue only euro notes and coins.
Enable closer monetary cooperation leading to a zone of monetary stability in Europe, particularly at first by means of the European Currency Unit (ECU) which was at the centre of the system, and currently by the euro single currency; overcome constraints resulting from the de facto interdependence of European economies; achieve internal - price - and external - exchange rate - stability by means of a system of fixed but adjustable guidance rates resting on a variety of intervention and credit mechanisms.Available with paid subscription only.
(i) 'European Single Currency' - The first European Unit of Account (EUA) was adopted by Council on 18 Mar 1975, based on a composite basket of Community currencies. It was first used under the Lomé Convention and for European Investment Bank operations and was later introduced gradually into other sectors of Community activity. The European Currency Unit (ECU), set up in line with EMS, was a composite currency derived from fixed amounts of member states' currencies, based on a number of criteria related to basic economic factors. Originally (1 Jan 1979) it was composed of: 0.828 German mark, 1.15 French franc, 0.0885 pound sterling, 109 Italian lire, 0.286 Dutch guilder, 3.66 Belgian francs, 0.140 Luxembourg (Luxembourg) franc, 0.217 Danish krone, 0.00759 Irish pound. On 1 Jan 1981, the ECU replaced European Unit of Account (EUA) in the Community's general budget. Revisions of the composition of the ECU took place every 5 years, with the last revision occurring on 21 Sep 1989. On the coming into force of the Maastricht Treaty on 1 Nov 1993, the composition of the ECU basket was frozen at the amounts fixed at the revision of 21 Sep 1989, namely: Belgian francs 3.301; (British) pounds sterling 0.08784; Danish krone 0.1976; Dutch guilders 0.2198; French francs 1.332; German marks 0.6242; Greek drachmas 1.44; Irish punts 0.008552; Italian lire 151.8; Luxembourg francs 0.130; Portuguese escudos 1.393; Spanish pesetas 6.885. The value of the official euro in any currency was defined as the sum of the values in that currency of each individual currency in the basket. Although the amounts of each component currency were fixed, their relative value changed as they moved with respect to one another. Consequently, the weights of the currencies moved over time. On 31 Dec 1998, the weights of the constituent currencies in the basket were: Belgian franc 8.18%; (British) pound sterling 12.45%; Danish krone 2.65%; Dutch guilder 9.87%; French franc 20.31%; German mark 31.92%; Greek drachma 0.44%; Irish punt 1.09%; Italian lira 7.84%; Luxembourg franc 0.32%; Portuguese escudo 0.70%; Spanish peseta 4.14%.
On 15-16 Dec 1995, Madrid (Spain), the European Council named the European currency unit euro and confirmed the introduction of single currency from 1 Jan 1999. The euro was first used as: the numéraire for the setting of central rates in the exchange rate mechanism; the unit of account for operations under the intervention and credit mechanisms, a reserve instrument and a means of settlement among EMS central banks; a reference for the divergence indicator of this mechanism. On 1 Jan 1999, the euro ceased be a basket currency and became a currency in its own right, adopted by Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. These countries had already, in late 1998, cut their interest rates to a uniformly low level so as to promote growth and prepare the way for a unified currency. Euro coins and notes were introduced into circulation in Jan 2002 and local currencies in the (currently 12) countries adopting the euro were withdrawn from circulation by July 2002.
(ii) 'Exchange Rate Mechanism (ERM)' - a fixed exchange rate system was agreed in principle by European Council, 6-7 July 1978, Bremen (Germany FR), and commenced on 19 Mar 1979. It operated until the beginning of European Economic and Monetary Union, 1 Jan 1999. Participating currencies included: Austrian schilling, Belgian franc, Danish krone, Dutch guilder, French franc, German mark, Irish pound, Luxembourg franc, Portuguese escudo and Spanish peseta (the Italian lira and pound sterling left the mechanism in Sep 1992). Central rates were set in euro for the participating currencies and these were used to establish a grid of bilateral central rates. Fluctuation margins, established around the bilateral central rates, determined the intervention limits, were originally set at 2.25% (with provision for wider margins of up to 6%). On 2 Aug 1993, the fluctuation margins were extended to 15%. If intervention limits were reached, the central banks of the two currencies concerned had to intervene in the market to ensure that the limits were not exceeded. Realignment of a central rate could take place by common accord. Each central bank participating in the exchange rate mechanism contributed 20% of its gold holdings and 20% of its gross dollar reserves as at the last working day of the month to the European Monetary Institute (EMI) and was credited with the corresponding amount in euro. The agreement of 13 Mar 1979 between central banks of the member states of the European Economic Community, laying down the operating procedures of the European Monetary System, provided for a 'Divergence Indicator'. A 'threshold of divergence', set at 75% of the maximum divergence spread provided for by this indicator, was to act as an early warning system for measures to be taken by the authorities to correct the situation. However, this indicator was never used in practice.
(iii) 'Credit Mechanisms' were designed to facilitate operation of the Exchange Rate Mechanism and help finance temporary balance of payments deficits. They include:
• Very Short-term Financing Facility (VSTEF), available for both marginal (unlimited amounts) and intra-marginal intervention; debt repayable 45 days from the end of the month in which the intervention takes place, may be extended for 3-6 months longer.
• Short-term Monetary Support (STMS), offering short-term balance of payment support; total amount available - euro 18,785 million; loans have an initial duration of 3 months renewable for up to a further 6 months.
• Mobilization Mechanism, introduced in 1985, allowing a central bank in need of intervention funds to swap its official euro holdings against US dollars (and other currencies); amount available depends on the central bank's gold and US dollar contributions to the EMI plus/minus any debtor/creditor positions; duration of swaps 3 months, renewable once.
• Medium-term Financial Assistance (MTFA), available to member states experiencing serious balance of payments difficulties; total amount euro 16,000 million; loans subject to conditionality.
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