European Monetary System (EMS): what it is – Dictionary of Economics

Concept of European Monetary System (EMS)

The European Montery System (EMS) was born as a result of a Resolution of the European Council of December 5, 1978 that began to function on March 13, 1979 in accordance with an agreement concluded on the same day between the central banks of the States that formed part of the European Community. Its main objectives were to stabilize exchange rates to correct the existing instability, reduce inflation and prepare the European monetary union through cooperation.

Elements of the European Monetary System (EMS)

The EMS was made up of three basic elements: ECU, Exchange Rate Mechanism (ERM) and European Monetary Cooperation Fund (FECOM). The ECU was a European unit of account formed by a basket of currencies of the Community States, whose value was a weighted average of the value of those currencies, based on indicators of their economic weight and their international trade. Although not legal tender, the ECU was used as a unit of account in the community budget, served as a means of payment and reserve for central banks, and was used as a denomination currency for financial instruments. At the European Council held in Madrid on December 16, 1995, it was agreed that the future community currency would be called the euro. On January 1, 1999, with the beginning of the third phase of the Economic and Monetary Union, the euro replaced the ECU at par (1 euro = 1 ECU). The MTC was a mechanism whose objective was to stabilize the different exchange rates of the participating currencies. To this end, a central exchange rate was established for each currency with respect to the ECU and bilateral central rates between the participating currencies. Exchange rates could fluctuate within a band set around bilateral rates. The central exchange rates could be modified by mutual agreement between all the States participating in the ERM. In 1993, by widening the fluctuation band of the system, the ERM entered into crisis and was replaced, in 1999, by a new cooperation framework on exchange matters between the euro zone and the States of the European Union that have not joined in it, the MTCII or Exchange Rate Mechanism II. The FECOM was created in October 1972 to promote the progressive narrowing of the fluctuation margins of the European currencies among themselves, to facilitate interventions in community currencies on the foreign exchange markets and to promote settlements between the central banks that had as their object a policy arranged reservations.

Origin: Bank of Spain