European Monetary System (EMS) - Stage I, Stage II, Stage III

A financial system set up in 1979 by member states of the European Economic Community with the immediate aim of stabilizing exchange rates and the ultimate aim of achieving Economic and Monetary Union (EMU), with a single European currency. A European Currency Unit (ECU) was created, but only as a unit of account; later named the Euro. Central banks were to consult on exchange rates, and to assist each other in stabilizing them both bilaterally and through a European Monetary Cooperation Fund. Members could join an Exchange Rate Mechanism (ERM), which limited fluctuations in the exchange rates between its members. The first stage of formal EMU was established in 1990, when the Committee of Governors of the Central Banks of the EEC member states was given additional responsibilities to engage in the required preparatory work. The second stage was the replacement of this body by the European Monetary Institute (1 Jan 1994), whose activities included the introduction of a new Exchange Rate Mechanism (ERM II), adopted in mid-1997. The third stage, the adoption of the Euro by those member states which satisfied the entry conditions laid down by the EU Council, began on 1 January 1999. A new European Central Bank was set up (1 Jun 1998) to control monetary policy in the third stage.

There are three stages of monetary cooperation in the European Union.

Stage I

main article: European Currency Unit

European Monetary System (EMS) was an arrangement established in 1979 under the Jenkins European Commission where most nations of the European Economic Community (EEC) linked their currencies to prevent large fluctuations relative to one another.

After the collapse of the Bretton Woods system in 1971, the EEC countries agreed in 1972 to maintain stable exchange rates by preventing exchange fluctuations of more than 2.25% (the European "currency snake"). In March 1979, this system was replaced by the European Monetary System, and the European Currency Unit (ECU) was defined.

The basic elements of the arrangement were:

The ECU: A basket of currencies, preventing movements above 2.25% (6% for Italy) around parity in bilateral exchange rates with other member countries. In the early 1990s the European Monetary System was strained by the differing economic policies and conditions of its members, especially the newly reunified Germany, and Britain permanently withdrew from the system.

Stage II

main article: European Exchange Rate Mechanism

The European Monetary System was no longer a functional arrangement in May 1998 as the member countries fixed their mutual exchange rates when participating in the euro.

Stage III

main article: Economic and Monetary Union of the European Union

The EMS-2 is sometimes described as "waiting room" for joining the Economic and Monetary Union of the European Union.