The European Monetary System, EMS

From World War II to the early 1970s a number of countries sought to ensure stable exchange rates by joining the Bretton Woods system. Under this system, the countries were to maintain a stable exchange rate vis-à-vis the US dollar or gold, and thus indirectly also vis-à-vis each other. The Werner Report from 1970 envisaged European economic and monetary union with fixed exchange rates between EC member states, but these plans were abandoned. After the international currency unrest in the early 1970s it was therefore decided to initiate cooperation regarding stable exchange rates between a number of EC and non﷓EC countries in Europe. This cooperation, which was established in 1972, was known as the Snake in the Tunnel.

The Snake was the forerunner of the European Monetary System, EMS, which the EC set up in 1979 at the initiative of France and West Germany. The objective of the EMS was to enhance exchange-rate-policy cooperation. Under this system, each currency had a central exchange rate vis-à-vis the other participating currencies. As a general rule, the central rate was fixed, but could be adjusted if the parties agreed. The actual exchange rate in the market could fluctuate around the central rate. To prevent major fluctuations, fluctuation bands were introduced to define the range within which the exchange rate had to stay. The central banks were also committed to helping each other to keep the exchange rate within the band. At first frequent exchange-rate adjustments were required, but particularly between 1987 and the summer of 1992 the EMS was stable. However, during 1992 and 1993 significant currency unrest was seen, and it was decided to widen the fluctuation band considerably. This in reality undermined the system. Nonetheless, the exchange rates of the EU member states have been generally stable since then.