This website uses cookies to ensure you have the best experience. Learn more

The European Monetary System Essay

2077 words - 9 pages

The European Economic Community (EC) was established by the Trety of Rome in 1957 with the intent of reaching full economic, monetary, and political union among its member countries. The primary goal of this European Community was to operate as a single market. In the beggining the European Community was consited of France, Germany, Italy, Belgium, Netherland and Luxembourg. Those countries were the first, because they had open economies. Nowadays, the members of the European Community are 15 countries. Iin order for a common market to be established, the need of a common currency was essential. By that the transaction cost would be eliminated and the uncertainty of the ...view middle of the document...

In order for the EU to prevent more countries from being forced out, in 1993 the ERM band was widened for all currencies except the Dutch Guilder and the Deutschmark. This action left only the Netherlands and Germany within the 2.25 percent band. By the april 1994, Belgium, Denmark, France, Ireland and Luxembourg were bac within the 2.25 percent band, but Spain and Portugal remain under pressure (Microsoft Encarta 98). As we mentioned before, the ERM was based on the ECU. The ECU is a monetery unit based on a basket of all EC currencies. The number of units of each currency in the ECU is fixed, the weights of the various currencies change over time, as intra-European exchange rates fluctuate. The ECU also functions as a reserve instrument. It is issued by the European Monetary Cooperation Fund to the EMS central banks, in exchange for 20% of their gold reserves and U.S dollar reserves. The amount of ECU created as a result is adjusted every three monts to take account of changes in the level and variation of gold and dollar reserves (Kondonassis 4). Some componets of the ERM is the availiability of credit financing. There are three financing facilities in the EMS: 1) the Very Short Term Fancing Facility (VSTF), 2) the Sort Term Monetary Support (STMS) and the Medium Term Financial Assistance (MTFA). The first two are administered bycentral banks, the third by the EC Council of Ministers. " The purpose of the VSTF is to finance obligatory intervention in EC curencies. VSTF consists of an unlimited credit line that the central banks participating in ERM open to each other, in their own currencies. The amounts drawn are expresed in ECU's and carry interest. This financing is of very short duration, but it can be extended for three months subject to certain conditions and limits. With the consent of the creation a second extension of three months. The Short Term Monetary Support is a system of mutual credit for all the central banks of the EC. It was increased in volume and in duration on the creation of the EMS. The initial loan period is three months, but can be extended to a total duration of nine months. Finally, the Medium Term Financial Assistance is a system of mutual credit that EC meber states can grant each other for a period of two to five years. (Kondonassis 5) The parity grid consist of the central rate, the bicentral rate and arginal intervation. Subject to agreement of all ERM participants, each member has a central rate. The central rate is expressed as the amount of theat nation's currency equal to one ECU. The central rates are fixed andare revised only with a realignment. These rates are used in the parity grid to monitor currency fluctuatons relative to each other. The ratio of one country's central rate to another's forms the bicentral rate. From this bicentral rate, the value of this ratio is alowed to fluctuate up or down 2.25%. ehen the ratio reaches the allowable "margin", action must be taken by both...

Find Another Essay On The European Monetary System

The History of the European Monetary Union

3624 words - 14 pages The European Monetary System (EMS) was an arrangement established in 1979 where most nations of the European Economic Community (EEC) linked their currencies to prevent large fluctuations relative to one another. In 1971, most of the EEC countries agreed in 1972 to maintain stable exchange rates by preventing exchange fluctuations of more than 2.25%. In March 1979, this system was replaced by the European Monetary System (EMU). (De Grauwe, 2003

The Impact of European Monetary Union

2107 words - 8 pages I. Introduction According to Lane (2006), the European Monetary Union (EMU) began on the year 1999. Following his line of analysis and reasoning, this paper shall seek to analyze the purported impacts of the said action in the light of their inflation rates and the proportion of their portfolio holdings allocated to the other members of the Euro-zone. Furthermore, the author of this paper shall look qualitatively in the current Asian context to

Is the European Monetary Union a disaster? ? Discuss

3423 words - 14 pages establish a Monetary Union, such as the so-called “Werner- Plans” in 1979 through the European Monetary System (EMS), failed though. In 2002 the EMU finally was put into full effect. Now that the Euro- countries have experienced three years with the Euro, it is possible to make a preliminary assessment of the Euro.       In order to detect whether ‘EMU is a disaster’ one has first to establish the meaning and context in

The European Union Vs. A Federal System

978 words - 4 pages Introduction Before discussing the notion that the European Union (EU) possesses a federal character, one has to define federalism (federal system). A Federal system is a system of government where power and sovereignty are shared constitutionally between a central authority and subunits. The central authority retains primary sovereignty while the subunits (state, province etc.) retain a degree of autonomy. Examples of federal countries

The European Monetary Union (EMU) - The Euro as a Single Currency

1720 words - 7 pages conditions. The size of a specific national market will lose its significance. Competition will increase and could lead to greater harmonization across the euro area. The introduction of the euro will have a great impact on the financial sector. This is because of three main reasons: · The European System of Central Banks will be operating the single monetary policy in euro. So, it will be necessary for financial institutions to be able

Is the European Union more than a regional state-system?

1928 words - 8 pages that stress the supranational character and the autonomous power institutions have in the European Union and the ones who claim that it is only a regional state-system where national governments play the decisive role. The former is commonly referred to as the federalist school of thought while the latter go by the name of the intergovernmentalists. These main camps have throughout the years developed various subdivisions with slightly different

Information Technology and Expansion of the European International System

2860 words - 11 pages Information Technology and Expansion of the European International System "We are at risk. America depends on computers. They control power delivery, communications, aviation, and financial services. They are used to store vital information, from medical records to business plans, to criminal records. Although we trust them, they are vulnerable -- to the effects of poor design and insufficient quality control, to accident, and perhaps most

The Unconventional Monetary Policies Implemented by the Bank of England, U.S. Federal Reserve and the European Central Bank in Response to the Financi

2093 words - 8 pages The unconventional monetary policies implemented by the Bank of England, U.S. Federal Reserve and the European Central Bank in response to the financial crisis The signification of the financial crisis followed the collapse of Lehman Brothers in September 2008 caused the decrease in the market activity and the growth of globalization economy. A vast of problems, such as deflation, reduction in capital liquidity and so forth, confront with

The Pros and Cons of EMU - European Monetary Union. A concise summary (3000 words) of the main pros and cons of EMU and the Euro - covering economics, social issues, national soviergnty, etc

3421 words - 14 pages advent of the Breton Woods system in the USA promised increased stability through the use of a controlled mechanism of exchange rates. And, by 1969, the EU was beginning to target full monetary union, and this was the centre of debate at the Hague Summit. Progress was very slow however, and it wasn't until 1979 that Chancellor Schmidt of Germany, despite the advice of his own central bank, decided to implement the European Monetary System (EMS

Wide scale penetration of Renewable Electricity in the Greek Energy System in view of the European decarbonization targets for 2050

761 words - 4 pages consumption in transport and heating, together with smaller amounts of natural gas which was recently introduced, have resulted in high imports dependency reaching 71% of gross inland consumption. Efforts to adopt common European policies regarding mitigation of GHG emissions have led to a gradual increase of RES deployment and improvement of energy efficiency. Increase in fuel prices after 2008 and the economic recession have slowed down energy

Explaining the value of our money. It compares and contrasts how we obtained our monetary system

582 words - 2 pages Throughout history civilizations have exchanged goods and even developed currency. Whether coins or cloth these exchanges of goods all had value to the trading partner. In modern day civilizations we use paper currency and coins. To give these objects worth we must be able to back them with something that has value.Money is a means of exchange. Money is not the exchange of one commodity for a different commodity, such as trading a bushel of corn

Similar Essays

The European Monetary Union Essay

602 words - 2 pages The European Monetary Union The European Monetary Union (EMU) serves as an economic necessity, a complement to the European single market, which is the free movement of people, goods, services, and capital within the European Union (EU). The Euro, a single currency created under ideals of the Maastricht Treaty, will strengthen European unity and constitute as a factor for stability, peace, and prosperity for all member states as well as

Sustaining The European Monetary Union Essay

2806 words - 12 pages , and Spain. Many of these countries have become dependent on financial assistance after adopting the Euro, leading to the popular belief that the European monetary union (EMU) is destined to fail.2 Furthermore, debt and illiquidity have crippled the Eurozone with no relief in sight. Despite these problems, the European monetary union can be conserved and improved to maintain stability and establish an evolving model for countries around the world

The International Monetary System Essay

740 words - 3 pages Throughout history the international monetary system has undergone profound changes and constant evolution. During the sixteenth to the mid-eighteenth century Mercantilism was the predominant system in which power and increased wealth mostly gold, silver and raw materials from the colonies. It was a period in which the "wealth was power, and power was wealth." Followed mercantilism began the period of industrialization or the British

The Monetary System Essay

614 words - 3 pages many husbands have sailed the ocean to establish a home and a trade in hopes of one day bringing their families to join them in new wealth? And how many young souls, with only one hope for a bright future, have bartered themselves for passage to America, pursuing the tales of a golden shore across the sea? What Mr. Franklin indicates as a consequence of our current monetary system, will not happen until the freedom and promise of America is extinguished.