The European Monetary System A Quest for Stability Amidst Challenges

University:
University of Cambridge
Course:
0455 IGCSE | Economics
Academic year:

2024
Views:

439

Pages:

1
Author:

Drake A. C.

“The European Monetary System: A Quest for Stability Amidst Challenges” The European Monetary System (EMS) was established in 1978 with the support of key European nations. It aimed to create monetary stability by achieving low inflation and stable exchange rates, improve economic policy coordination among member states, and address world monetary instability through common policies toward third countries. The EMS introduced the Exchange Rate Mechanism (ERM), consisting of the European Currency Unit (ECU), parity grid, divergence indicator, and credit financing. The ECU served as a monetary unit based on a basket of EU currencies and a reserve instrument issued by the European Monetary Cooperation Fund (EMCF). The parity grid connected each currency to others through mutually agreed exchange rates, with central rates determined by unanimous agreement. The divergence indicator warned when a currency was diverging from its central rate, prompting corrective measures. Credit facilities were available for member countries to intervene in the foreign exchange market. The EMS aimed to promote economic trade, growth, and convergence of economic and monetary policies. However, it faced challenges, including the asymmetry problem where deficit and surplus countries had different pressures for adjustment. Speculative pressures and sterilized intervention also led to asymmetry. Capital controls were implemented to manage disruptive capital flows. In summary, the EMS aimed to create monetary stability and policy coordination in Europe but faced challenges related to inflation differentials and asymmetric pressures within the system.