Settling for Less: European Monetary System vs. European Monetary Union

Abstract

In July 1978, when the heads of state of the member countries of the European Community (EC) met to chart closer monetary cooperation, the integration scheme comprised nine members: the original six and the three latecomers on the northwestern periphery (United Kingdom, Ireland, Denmark), who had joined in 1973. The main features of the envisaged European Monetary System (EMS) were set out in a resolution adopted by the European Council in December 1978. Accordingly, the second, decisive, stage would be launched two years later with the creation of a European Monetary Fund. The EMS went into operation on March 13, 1979, thereby rendering inoperative what was left of the common margins arrangement, known as the snake. The only EC member unwilling to participate in all aspects of the EMS was the United Kingdom, which to this day has remained outside the exchange-rate mechanism.' Even though the United Kingdom does not share the facility to finance intervention in the foreign-exchange market, the pound sterling is included in the basket forming the European Currency Unit (ECU). How did the European Council, which stated as the main objective of the EMS the creation of a zone of monetary stability, expect the new organization to achieve it?2 Two features hark back to the Bretton Woods system: (1) a set of fixed but adjustable exchange rates, and (2) a European Currency Unit. Each of the eight currencies was assigned a central rate expressed according to the ECU.3 These central rates, in turn, determine a grid of bilateral central rates, with the fluctuation margins men-