European Monetary System (EMS)
Candlefocus EditorThe EMS was intended to foster closer cooperation among the Member States and promote sound financial market trends. For example, the EMS provided a framework that allowed member countries to keep their currencies stable and prevent large exchange rate fluctuations.
In practical terms, the EMS worked according to the Exchange Rate Mechanism (ERM). This mechanism allowed each nation to maintain the value of their currency against other Member States’ currencies within bands of +/- 2.25%. This allowed for greater exchange rate stability compared to one another.
The success of the EMS ultimately led to a stronger convergence between member countries’ economies and to greater stability of the euro exchange rate against other global currencies. It also acted as an impetus for the creation of a single currency in Europe, the euro.
The EMS was replaced by the EMU in 1999. The EMU created a single currency and a single monetary policy across all the Member States. This means that there is one convertible currency that is utilized by all the members of the EU, and thus there is no fluctuation of exchange rates among them.
The EMS was an innovative step in the development of the European Union, and it resulted in a stronger united economy and a more stable global finance. By establishing a more competitive and efficient European economy, the EMS was the first major step in creating a single market economy. Although it has been replaced by the EMU, the EMS is still remembered today as the foundation of what made the euro possible.