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PART III. THE EUROPEAN MONETARY SYSTEM

PART III. THE EUROPEAN MONETARY SYSTEM

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THE EUROPEAN MONETARY SYSTEM

B. EMS Objective:

to provide exchange rate

stability to all members by

holding exchange rates

within specified limits.

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THE EUROPEAN MONETARY SYSTEM

C. European Currency Unit

(ECU)

a “cocktail” of European

currencies with specified weights

as the unit of

account.



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THE EUROPEAN MONETARY SYSTEM

1. Exchange rate mechanism

(ERM)

- each member determines mutually

agreed upon central cross rate for

currency.



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its



THE EUROPEAN MONETARY SYSTEM

2.



Member Pledge:

to keep within 15%

margin above or below

the central rate.



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THE EUROPEAN MONETARY SYSTEM

D. EMS ups and downs

1. Foreign exchange

interventions:

failed due to lack of

support by coordinated

monetary policies.

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THE EUROPEAN MONETARY SYSTEM

2. Currency Crisis of Sept. 1992

a.

System broke down

b. Britain and Italy

forced

towithdraw

from EMS.



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THE EUROPEAN MONETARY SYSTEM

G. Failure of the EMS:

members allowed political

priorities to dominate

exchange rate policies.



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THE EUROPEAN MONETARY SYSTEM

H. Maastricht Treaty

1. Called for Monetary

Union by 1999 (moved to

2002)

2. Established a single

currency:

the euro

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THE EUROPEAN MONETARY SYSTEM

3.



Calls for creation of a single

central EU bank



4.



Adopts tough fiscal

standards



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THE EUROPEAN MONETARY SYSTEM

I. Costs / Benefits of A Single Currency

A. Benefits

1. Reduces cost of doing

business

2. Reduces exchange rate

risk



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THE EUROPEAN MONETARY

SYSTEM

B. Costs

1. Lack of national

monetary flexibility.



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PART III. THE EUROPEAN MONETARY SYSTEM

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