European Monetary System

European Monetary System (EMS), system which aimed to facilitate financial cooperation and monetary stability within the European Union (EU). The EMS came into force in March 1979 as a response to the disruption being caused to European economies by fluctuating exchange rates in the wake of the 1974 oil crisis. Its purpose was threefold: to establish monetary stability; to overcome constraints caused by the interdependence of EU economies; and to aid the long-term process of European monetary integration.

The central component of the EMS was the Exchange Rate Mechanism (ERM), a voluntary system of semi-fixed exchange rates, based on the European Currency Unit (ECU)—the standard monetary unit adopted at the creation of the EMS and based on a weighted basket of member states' currencies. Under the ERM, participating currencies were allowed to fluctuate in relation to each other and to the ECU within a fixed band only.

The ERM was a key instrument of plans to achieve a single European currency administered by an EU central bank—the goal fixed by the 1992 Treaty of Maastricht. In 1993 the ERM band was widened for all currencies except the Dutch guilder and the Deutschmark—leaving only the Netherlands and Germany within the 2.25 per cent band that is one of the conditions for adoption of a single currency. By April 1994, Belgium, Denmark, France, Ireland, and Luxembourg were back within the 2.25 per cent band, but Spain and Portugal remained under pressure; in March 1995 they were forced to depreciate their currencies against the ECU. The European Monetary System as such was essentially superseded with the advent of the European single currency, the Euro, in January 1999, at which point the ECU ceased to exist and the ERM was superseded by the control of the Euro by the European Central Bank. See also Economic and Monetary Union.