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European Economic Community Essay

1715 words - 7 pages

From the late 1960’s onwards, international currency markets became increasingly volatile. The early part of the next decade brought the oil crises and further fluctuations, leading to attempts by European leaders to achieve monetary stability. The objective of the European Economic Community was to achieve an economic and monetary union by 1980, for closer economic and political integration. In 1979, however, the Member States (excluding the United Kingdom) created instead the European Monetary System (EMS), in order to attain stability in exchange rates and thus growth and stability in their economies. Under this new system, member countries harmonized monetary policies; through the use of an Exchange Rate Mechanism (ERM), the currencies of the eight states were only allowed to fluctuate by a certain amount, within a narrow band of 2.25% above or below the central rate. A new European Currency Unit (ECU) was introduced, consisting of a currency basket of a weighted average of members’ currencies. Each member country was to contribute reserves to a common fund, to support the system in case a currency became ‘divergent’. The system was very similar to the European “Snake”, which began in 1972. Ireland, whilst undecided whether it was a good idea to break the link with the Pound Sterling for a time, chose to join the EMS, and hence the ERM, from the beginning. The UK, on the other hand, were wary of joining at first and delayed entry of the Sterling until 1990, only to leave two years later, on 16 September, or “Black Wednesday”, following increasing unsustainable pressure on their currency. The two governments essentially chose to join the ESM under the impression that the currency stability it promised, through coordinated monetary policy, would leave their economies and their people better off; can one policy really achieve maximum equal benefit for all the countries (of different sizes, strengths, etc) involved though? Is it simply a case of one size fits all, or is monetary policy best left to each indivial country to decide and implement as they see appropriate?
Since 1927, when the Saorstát pound was introduced, Ireland’s currency was pegged one-to-one with the British Pound Sterling. Given that our main trading partner was the UK, and the sterling had been underwritten by the Gold standard at the time, it was a logical choice when it first was initiated. However, as the years went on the currency became increasingly unstable, with several abrupt depreciations, and the Irish Pound suffered as a result. In the 1970’s the government realized change was needed to gain currency stability and lower inflation, possibly in the form of a different exchange rate regime (Honohan, 2010). The ESM provided such an opportunity, and Ireland expressed enthusiasm for the proposed scheme almost immediately. With growing doubt as to whether the UK would also join, however, it took a while (and some attempts at negotiating) before a definite decision was...

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