What Is the European Monetary System?

European Monetary System (EMS), also known as the "European Monetary System". A currency group established by a resolution of European Community countries. Formally established in March 1979. Aimed at establishing a European currency stability, maintaining exchange rate stability among member countries within the Community, avoiding the effects of the instability of the US dollar, developing economic and trade relations between member countries, promoting investment, increasing economic growth and employment in the common market, and promoting Western European union . Main contents: Implement a fixed exchange rate system between member countries and a floating exchange rate system for non-member countries; create a European currency unit and make it gradually play a monetary role; prepare to establish a European Monetary Fund to strengthen the power to intervene in the market and provide credit; Member States with poor economic conditions provide various funding. ^[1]

European Monetary System

In late September 1992, the European foreign exchange market was filled with a climate of fierce fighting.

The European Payments Union was established in 1950, this is

The European Monetary System is essentially a fixed and adjustable exchange rate system. It includes three aspects:

1. It has weakened the hegemony of the dollar to a great extent;

2. As the parity system of the European monetary system stabilizes the exchange rate, it has an inestimable effect on the economic and trade development of the European Community countries;

3.

Contradictions in the European Monetary System

Problems and contradictions:

1. Imbalanced economic development of major member states of the European monetary system

2. Limitations of the exchange rate mechanism of the European Monetary System

3. The determination of the European Currency Unit itself creates contradictions

4. European Monetary Fund failed to establish

The determination of the European monetary unit itself creates a certain contradiction. The strength of the member states of the European Community is not fixed. Once the change has reached a certain level, it is required to adjust the weight of the currency of each member state. Although it is stipulated that the weights change every five years, if the changes in strength are not discovered in time or the changes in strength are not discovered or adjusted in a timely manner, the spontaneous adjustment through the market will make the European monetary system A crisis broke out.

The immediate cause of the crisis: the strengthening of German power

The most serious currency crisis since World War II occurred in the European currency market in mid-September 1992. The root cause was that the increase of German power broke the balance of power within the European Community. At that time, Germany's economic strength was greatly enhanced by the unification of East and West. Although the German mark's share in the European monetary unit was not high, the relative share of the mark in the European monetary unit continued to increase due to the increase in the exchange rate of the mark against the US dollar. Because the European Monetary Unit is a unit of account for commodity labor exchanges and capital flows in the member states of the European Community, changes in the value of the mark or German monetary policy can not only influence the macroeconomics of Germany, but also the macroeconomics of other members of the European Community. Make a bigger impact. The British and Italian economies have been sluggish, with slow growth and increasing unemployment. They need to implement low interest rate policies to reduce corporate borrowing costs, allow businesses to increase investment, expand employment, increase output, and stimulate household consumption to boost the economy. However, at the time after Germany's reunification with the West and Germany, a huge fiscal deficit appeared. The government feared that this would lead to inflation, dissatisfaction with Germans accustomed to low inflation, and political and social problems. Therefore, Germany, which had an inflation rate of only 3.5%, not only rejected the demand of the last G-7 summit for a rate cut, but raised the discount rate to 8.75% in July 1992. In this way, the excessively high German interest rate caused a surge in the foreign exchange market to sell the pound and lira and snap up the mark, which caused the exchange rate of the lira and the pound to plummet. This was the direct cause of the European currency crisis in 1992.

Crisis fuse-Decoupling of Finnish and German marks

The first response to higher interest rates in Germany was Finland in northern Europe. The Finnish mark and the German mark are automatically linked. After Germany raised interest rates, Finns have replaced the Finnish mark with the German mark. By September, the exchange rate of the Finnish mark to the German mark continued to fall. In order to maintain the parity, the Finnish central bank had to sell the German marks to buy Finnish marks, but the Finnish marks continued to plunge. The Finnish central bank's German marks were limited. The Finnish government suddenly announced that the Finnish marks and German marks were decoupled and floated freely.

At that time, the British and French governments suggested to the German government to reduce the interest rate because of the seriousness of the problem. However, Germany considered that the decoupling of the Finnish mark was trivial and rejected the British and French government's proposal. . When the speculators in the money market got the news, they recklessly turned the speculative target to the constantly strengthening German mark.

First adjustment of parity in the European monetary system

The Italian lira, which has been a soft currency in the European monetary system, has been in a hurry, and the exchange rate has fallen all the way, falling to the maximum lower limit of the lira to the Mark exchange rate in the exchange rate mechanism of the European monetary system. In this case, although the Italian government raised the bank discount rate twice on the 7th and 9th, from 12% to 15%, and also sold marks and francs to the foreign exchange market, but it has not been able to ease the situation. . On September 13, the Italian government had to announce a depreciation of the lira and reduce its parity by 3.5%, while the other 10 currencies of the European monetary system would appreciate by 3.5%. This is the first parity of the European monetary system since January 12, 1987. Times adjustment.

At this time, the German government made a small concession in order to maintain the operation of the European monetary system, officially announced that the discount rate has been reduced by half a percentage point, from 8.75% to 8.25%, which is the first interest rate cut in Germany in five years.

Britain and Italy break away from European monetary system

Germany s move was highly appreciated by the United States, Britain, and France, but it was too late and a greater storm was blowing on the British foreign exchange market. On the day after Germany announced a rate cut, the exchange rate of the pound dropped all the way, and the exchange rate between the pound and the mark broke through three lines of defense and reached 1 pound equal to 2.78 marks. The British pound s plunge caused the British government to mess up. On the morning of the 16th, it announced that it would raise bank interest rates by 2 percentage points, and a few hours later it announced a 3 percentage point increase, raising interest rates from 10% to 15%. Raising interest rates twice a day is unique in modern British history. The purpose of this anomalous move by Britain is to attract short-term foreign capital inflows and increase demand for the pound to stabilize the pound's exchange rate. However, the changes in the market are subtle. Once confidence is shaken and the general trend has been achieved, it is difficult to curb the trend of exchange rate changes.

From September 15th to 16th, 1992, central banks of the world injected tens of billions of pounds of funds to support the pound, but to no avail. On the 16th, the exchange rate between the British pound and the mark fell from 1 pound to 2.78 marks the previous day to 1 pound to 2.64 marks, and the exchange rate between the pound and the dollar also fell to the lowest level of 1 pound to 1.738 dollars. After all the organs were exhausted, on the evening of September 16, the British Chancellor of the Exchequer Lamont announced that Britain had withdrawn from the European monetary system and lowered the interest rate by 3 percentage points. On the morning of the 17th, interest rates were lowered by 2 percentage points and returned to the original 10% level. .

After the Italian lira depreciated on the 13th, only three days later, it was in crisis in the foreign exchange market again. Mark's exchange rate against the lira again exceeded the limit of the readjusted exchange rate. The Italian government spent 40 dollars to save the lira. The trillion-lire lira's foreign exchange reserves did not work, so it had to announce that it had withdrawn from the European monetary system and allowed it to float freely.

EC finance officials held a six-hour emergency meeting and announced that they agreed to temporarily detach Britain and Italy from the European monetary system, and the Spanish match tower depreciated by 5%. From January 1987 to September 1992, the exchange rate of the European monetary system was adjusted only once in more than five years, and the secondary adjustment was made within three days from September 13 to 16, 1992. This shows the severity of the European currency crisis.

European currency storm subsides

Until September 20, 1992, the French referendum adopted its central idea to establish a country that still has great differences in culture and politics into a political entity similar to the United States of Europe. Its members must not only use the same currency, but also It is necessary to pursue the "Mastich Treaty" of a common foreign and security policy to temporarily calm down the European currency turmoil, and the sterling and lira tend to be in a balanced state after devaluation.

Lessons from the European currency crisis

There are many profound lessons from this currency crisis. There are also important implications in terms of ensuring the stability of Hong Kong's financial market. This is to strengthen the coordination and cooperation of international monetary and financial policies. The September financial turmoil in Western Europe largely reflected the incoordination of monetary and financial policies in the major industrial countries of the European Community. At that time, with its economic strength growing and Mark's strength, Germany was still paranoid about its own interests. Regardless of the economic slump of Britain and Italy, and to lower the interest rate for their own economic development, they not only rejected the G-7 summit. The call for a rate cut instead raised the interest rate. Under the circumstances that the Finnish mark was forced to decouple from the German mark, it was not aware of the urgency of maintaining the operating mechanism of the European monetary system, and even publicly announced that it would never reduce the interest rate. When the turmoil in the foreign exchange market broke out, it was announced that it would reduce its discount rate by half a percentage point. It is a concession to inflation. Of course, the fault of this crisis cannot be blamed entirely on Germany. However, it must be emphasized that in today's economic integration and globalization, despite the growing economic contradictions among countries, no country can go it alone. Only through cooperation and coordination can we achieve stable development. The world is moving in the direction of international cooperation and policy coordination. This trend has become an irreversible trend. The so-called policy coordination is to make common adjustments to certain macroeconomic policies and jointly intervene in mutual economic relations and economic activities in order to achieve the purpose of mutual assistance and mutual benefit. This is mainly due to the spill-overeffect of the economic policies of various countries, that is, the policies adopted by one country often affect the economic operations of other countries. As a result, coordinated economic policies adopted by various countries will promote the development of the world economy, and doing things differently will often have adverse consequences.