Describe how the European Monetary System 1 (

Describe how the European Monetary System 1 (1979-1998) worked. PRESENTED BY: AVRIL TIMMINS

Table of Contents

Overview Overview and background of the European Monetary Systems 1979-1998

Main body How the European monetary system worked

Conclusion Results and findings

Overview and Background

Anon., 2015. european monetary systems 1979. [Online] Available at: https://www.google.ie/search?q=european+monetary+systems+1979&source=lnms&tbm=isch&sa=X&ved


The European monetary systems was also know as the exchange rate mechanism one. It was set up on March 13th 1979. There was eight participating countries in the EMS, theses' were Ireland, Luxemburg,

France, Italy, Belgium, Denmark, Germany, and Netherlands.

Finnegan, M., 2015. Gmit learnonline. [Online] Available at: https://learnonline.gmit.ie/course/view.php?id=94


Anon., 2015. original european economic community. [Online] Available at: https://www.google.ie/search?q=original+european+economic+community&biw=1280&bih=865&tbm=isch&i


Its main goal was to reduce exchange-rate instability – which damages trade, investment and economic growth. Two elements of flexibility1. Each currency could fluctuate within a specified band.2. Central rate could be realigned if no longer appropriate.

Phase 3: the Delors Report, 2014. Phase 2: the European Monetary System - European .... [Online] Available at: http://ec.europa.eu/economy_finance/euro/emu/road/delors_report_en.htm

Anon., 2015. original european economic community. [Online] Available at: https://www.google.ie/search?q=original+european+economic+community&biw=1280&bih=865&tbm=isch&imgil=nw5A2hkRvz54-M%253A%253BgsRacZdzN0Z5gM%253Bhttps%25253A%25252F%25252Fen.wikipedia.org%25252Fwiki%25252FEuropean_Communities&source=iu&pf=m&fir=nw5A2hkRvz54

Each currency could fluctuate within a specified band.

Finnegan, M., 2015. Gmit learnonline. [Online] Available at: https://learnonline.gmit.ie/course/view.php?id=94


The EMS had adjustable exchange rates defined in relation to the newly created European Currency Unit (ECU).

It was a currency basket based on a weighted average of EMS currencies. Within the EMS, currency fluctuations were controlled through the Exchange Rate Mechanism (ERM) and kept within ±2.25% of the central rates,

with the exception of the Italian lira, the Spanish peseta, the Portuguese escudo and the pound sterling, which were allowed to fluctuate by ±6%. In

August 1993, these bands were widened to 15% in order to counter speculative pressures, but by 1996 all currencies had moved back to their original fluctuation margins.


The system included an intervention mechanism and a preventive tool – once the exchange rate of a currency reached 75% of the maximum fluctuation margin authorised,

the currency was considered as ‘different' and the country had to take remedial action through interest rates and fiscal policy adjustments.

In the event of the maximum fluctuation margin being reached, central banks had to intervene by buying or selling the currency to avoid the margin being exceeded.

Werner Report, 2010. Phase 2: the European Monetary System - European .... [Online] Available at: http://ec.europa.eu/economy_finance/euro/emu/road/ems_en.htm

Flexibility with in the EMS

A realignment was an adjustment of an currency central rates against the other ERM currencies

If currencies warranted the purchasing power parity (PPP) grid was altered Between 1979 and 1998 there was 21 changes with in the ERM central rates The exception was a 3% revaluation of the Irish pound against all the other currencies

Flexibility with in the EMS

It was the margin of fluctuation around the central rates. Until August 1993 the maximum permissible devaluation of the strongest and weakest

currencies in the ERM from there central rate was ±2.25% The combination of periodic realignments and the margin of fluctuation around the

central rate meant that the EMS was a compromise between a rigidly fixed exchange rate system.

Walsh, A. L. B. M., 2003. The Macroeconomy. Dublin: Gill & Macmillan.

Ireland

Ireland realigned its central rate three times. Devalued its currency in 1983, 1986 and 1993. By using these mechanisms.

Finnegan, M., 2015. Gmit learnonline. [Online] Available at: https://learnonline.gmit.ie/course/view.php?id=94[Accessed 7 november 2015].

Results and Findings

As we can see from the evidence above: The EMS created a European Currency Unit (ECU) to be used as a unit of account. Although not a real currency, the ECU became the basis for the idea of creating a single

currency - an idea that was realised with the launch of the Euro in 1999.


Bibliography

Anon., 2015. european monetary systems 1979. [Online] Available at: https://www.google.ie/search?q=european+monetary+systems+1979&source=lnms&tbm=isch&sa=X&ved=0CAcQ_AUoAWoVChMIq9ixzqODyQIVylksCh028QmS&biw=1280&bih=865#imgrc=UptpT0rHdssG2M%3A[Accessed 7 november 2015].


Anon., 2015. original european economic community. [Online] Available at: https://www.google.ie/search?q=original+european+economic+community&biw=1280&bih=865&tbm=isch&imgil=nw5A2hkRvz54-M%253A%253BgsRacZdzN0Z5gM%253Bhttps%25253A%25252F%25252Fen.wikipedia.org%25252Fwiki%25252FEuropean_Communities&source=iu&pf=m&fir=nw5A2hkRvz54[Accessed 6 November 2015].

Phase 3: the Delors Report, 2014. Phase 2: the European Monetary System - European .... [Online] Available at: http://ec.europa.eu/economy_finance/euro/emu/road/delors_report_en.htm[Accessed 7 november 2015].

Bibliography

Werner Report, 2010. Phase 2: the European Monetary System - European .... [Online] Available at: http://ec.europa.eu/economy_finance/euro/emu/road/ems_en.htm[Accessed 7 november 2015].

Walsh, A. L. B. M., 2003. The Macroeconomy. Dublin: Gill & Macmillan. Honohan, P., 2015. Central Bank of Ireland - Presentation by Governor Patrick .... [Online]

Available at: https://www.centralbank.ie/press-area/speeches%5CPages%5CPresentationbyGovernorPatrickHonohanatQueen%E2%80%99sUniversityBelfast.aspx[Accessed 7 november 2015].

Civitas, 2015. Civitas: European Monetary System. [Online] Available at: http://www.civitas.org.uk/eufacts/FSECON/EC9.php[Accessed 9 november 2015].

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