European Monetary System

European Monetary System
A system of exchange-rate stabilization involving the countries of the European Union, which began operations in 1979. There were two elements: the Exchange Rate Mechanism (ERM), under which participating countries committed themselves to maintaining the value of their currencies within agreed limits, and a balance of payments support mechanism, organized through the European Monetary Cooperation Fund. The ERM operated by giving each currency a value in ECUs and drawing up a parity grid giving exchange values in ECUs for each pair of currencies. In practice, however, the Deutschmark replaced the ECU as the anchor currency. If market rates differed from the agreed parity by more than a permitted percentage (2.25% or 6% depending on the currency), the relevant governments had to take action to correct the disparity. Two currencies, the UK pound and the Italian lira, were forced out of the ERM in 1992 and some of the currencies remaining in it were allowed 15% fluctuations.
Although some saw the EMS as no more than a mechanism to facilitate monetary cooperation, the view that its ultimate goal should be European Monetary Union (EMU), with a single European currency and a European Central Bank gained ground in the 1980s and 1990s. The decision to create a single currency was part of the Maastricht Treaty of 1991. In June 1998 11 EU countries—all the then member states except Denmark, Greece, Sweden, and the UK—committed themselves to monetary union. Their currencies were locked together irrevocably and the European Central Bank was established to direct the single monetary policy essential for EMU. The euro was launched for all purposes except cash transactions in January 1999. Euro bank notes and coins came into circulation from January 2002 and the national currencies were withdrawn after a short transitional period. A new exchange-rate mechanism, known as ERM II, was established in January 1999 to link the currencies of other EU states to the euro (with fluctuation rates of plus or minus 15% as the basic rule). Its initial members were Denmark and Greece; the latter adopted the euro in 2001. In mid-2004 three of the new accession states—Estonia, Lithuania, and Slovenia—joined ERM II, with others announcing plans to follow suit in due course. Countries must participate in ERM II for a minimum of two years before adopting the euro.

Accounting dictionary. 2014.

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  • European Monetary System — (EMS) a European monetary unit, an exchange rate intervention mechanism and a transfer mechanism established in 1978 under the law of the European Communities. It is this system that established the European Currency Unit (ECU), a currency used… …   Law dictionary

  • European Monetary System —   [jʊərə piːən mʌnɪtərɪ sɪstəm, englisch], Abkürzung EMS, das Europäische Währungssystem …   Universal-Lexikon

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  • European Monetary System — (EMS)   Established in 1979 to secure a zone of monetary stability in Western Europe, with the Exchange Rate Mechanism (ERM) and the European Currency Unit (ECU) as its core elements. In the 1980s it increasingly became seen as inadquate, and… …   Glossary of the European Union and European Communities

  • European Monetary System — noun (singular) the EMS; a system for limiting how much the different currencies (currency (1)) of countries within the European Union can go up or down in value in relation to each other …   Longman dictionary of contemporary English

  • European Monetary System — /ˌjυərəpi:ən m nɪt(ə)ri sɪstəm/ noun system of controlled exchange rates between some of the member countries of the European Union. Abbreviation EMS COMMENT: The EMS now only applies to countries such as Greece which are members of the EU but… …   Dictionary of banking and finance

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