The European Monetary System aimed to stabilize exchange rates and reduce inflation, but struggled in the 1990s due to restrictions on monetary policy. It led to the introduction of the euro currency, reflecting the past system’s fixed exchange rates for greater stability.
The European Monetary System was an agreement between European nations to stabilize exchange rates and reduce inflation in their countries. It was created in 1979 as a successor to the Bretton Woods monetary system. The European Monetary System was an attempt to stabilize European currencies by placing restrictions on the monetary policy of participating countries. Many believed that fixed exchange rates, for example, could lead to greater economic stability and prosperity. Although the system struggled during the 1990s, it helped to introduce a common currency, the euro, among many European countries.
The Bretton Woods system was a set of economic agreements between many of the world’s most powerful nations. It came into effect at the end of World War II and lasted until the early 1970s, when it was largely abandoned by participating nations. Generally, the Bretton Woods system implied fixed exchange rates between major international currencies. The apparent stability in this type of system was one of the main incentives for the arrangement.
This stability was also what European leaders had in mind when they created the European Monetary System. The United States, on the other hand, was using floating exchange rates at that time. Floating exchange rates adjust according to the free market, which is usually a faster response than a government. Along with the free market, however, can come instability and unpredictability. The European Monetary System tried to gain stability from fixed exchange rates.
The system ran into trouble during the early 1990s. When exchange rates are fixed, a given country often loses its ability to manage monetary policy. For example, a government can no longer pursue inflation and interest rate targets by printing more or less money. The stability of the international economy takes precedence over local economic conditions. Some of the countries that found these restrictions unfavorable left the European Monetary System in the 1990s.
Several currency changes followed the European Monetary System. In 1998, the European Central Bank was established in Frankfurt, Germany. Soon after, the euro currency was launched in a large number of European countries, with the UK as a notable exception. The euro, in many ways, is a reflection of the past European monetary system, because having fixed exchange rates is similar to having the same currency. Local currency manipulation is hopefully sacrificed for greater currency stability.
Asset Smart.
Protect your devices with Threat Protection by NordVPN
