The document discusses the origin and development of the European Monetary System (EMS) and the later introduction of the Euro. It describes how the EMS was established in 1972 to link European currencies and stabilize exchange rates. The Exchange Rate Mechanism formalized central rates for currencies within prescribed margins. The goals were greater stability and economic convergence. However, the EMS collapsed in 1992-1993 due to currency crises forcing rates outside margins. The Maastricht Treaty established the Euro and steps to economic and monetary union, including establishing the European Central Bank and requiring member states to meet fiscal and debt criteria. The Euro was officially launched in 1999 among 11 initial members.

3. THE ORIGIN OF EMS
Snake Arrangement was introduced in an effort to link the
European currencies in April 1972. It states that each participating
member’s currency was assigned a bilateral central rate with each
other’s participating member’s currency.

4. EXCHANGE RATE MECHANISM IN OPERATION (1979-92)
 The system created by EMS was designed to function like a Mini Bretton Woods par
value system
 Rules for the Participants in the Exchange Rate Mechanism were as follows :
o Establish a central rate for their currency
o Denominated in terms of ECU (European Currency Unit)
o Obligated to maintain that rate within a prescribed Margin (in case it goes below or
over board the issuing country is required to intervene)
o If a participation state needs funds to finance intervention, they are provided for
short term basis from a central fund, EMCF (European Monetary Corporation Fund)
to which all member states had contributed.

5. EXCHANGE RATE MECHANISM IN OPERATION (1979-92)
Objectives of EMS (European Monetary
System)
Greater stability in exchange rates
among EMS currencies
Greater convergence among the
economies of the participating
countries

6. Collapse of the EMS :Two Crises

7. SEPTEMBER 1992 : THE POUND & THE LIRA
The Maastricht Treaty, calling for full monetary union - one currency, one
central bank was formally signed in February 1992, subject to ratification
by all 12 member states of the European Community.
Summer 1992, every state in the community was in recession. Also every
state in the community, opposition to Maastricht was stronger than it was
anticipated.
On September 20, French referendum resulted in narrow victory for the
Treaty, and the French and German authorities made clear they
determined to defend the parity between the French and the Mark and
also to preserve ERM.

8. JULY – AUGUST 1993 : THE FRENCH FRANC
In the midsummer 1993, turmoil again broke out in the ERM. In the third
week of July, the Central banks of Belgium, France, Denmark and Portugal
had all been forced to raise their interest rates in order to keep their
currencies within the ERM Brand , although their Domestic situation
spoke otherwise.
On August 2, Ministers and Governors announced that there was no
official intervention so long the currencies linked in the ERM moved
within a band range of 15%.

9. SOME LESSONS FROM THE EXPERIENCE OF THE EMS (1979-93)
The EMS was well conceived from a technical and legal point of
view.
EMS had two built in limitations :
The system depended on the essential stability of the currency
of the anchor state (German mark).
The EMS was able, by combination of realignments and fiscal
discipline to guide its member states into limited adjustments
for some dozen years.

10. Economic and Monetary Union : The Treaty of
Maastricht

11. THE VISION OF ECONOMIC UNION
The model of EMU is based on the same model as USA. One interest
rate would prevail in all member states of the EU.
EMU if successful, would bring significant economic effects :
Savings on transaction costs in trans border trade and investment
within the community.
Exchange stability
Possible creation of reserve currency to rival the US dollar
Significant political meaning

12. THE TREATY OF MAASTRICHT
The Treaty was created in several stages :
The first Stage : Beginning even before completion of the ratification process,
each member state was to adopt internal legislation necessary to implement the
subsequent stages.
In the Second Stage : Member states were obliged to regard their economic
policies ‘ as a matter of common concern’ to be coordinated within the European
Council.
In the third stage :
ECB as well as ESCB were to come into being
The Euro was to become the currency of EMU
Conversion rates between the currencies were to be locked in place irrevocably
Criteria to avoid excessive budget deficits were to become mandatory.

13. FROM MAASTRICHT TO E-DAY
In December 1995, the European Council meeting in Madrid,
confirmed the time table set out in the Treaty, and after much
speculation and debate in the press, settled on the name Euro
for a single currency of EMU.
11 states should adopt the single currency regime of Stage
three i.e. all the states of the EU except Greece, Denmark,
Sweden and UK.

14. The Constraints of the Euro Regime: The Stability
and Growth Pact

15. The council of EU reached agreement on the main elements of
Stability and Growth Pact – by forming a combination of Council
Regulations and Resolutions, reflecting a compromise between
Germany’s emphasis on monetary discipline and desire of France and
other states for more freedom of manoeuvre if economic conditions.
Sanctions would not quite be automatic if a Member State exceeded
the Limit, but require 2/3rd vote of the Council.
The Pact also puts in place an early warning system, pursuant to
which the Council would alert a Member State of the need to take
corrective actions to prevent a government deficient from becoming
excessive.

16. Preliminary Reflections on the Euro Regime

17. THE FIRST YEARS OF EURO
The exchange value of Euro declined steadily.
One of the reason for its decline was, that Euro did not become (At least in its
early years), either a transaction currency or a reserve currency to rival the US
dollar.
Euro largely accomplished the aims of the creators of the European Economic and
Monetary Union:
Italy and Greece have benefitted from the measures that probably could not have
been undertaken without the pressure of monetary union.
Corporate managers have been forced to pay more attention to shareholder value
Tax rates are more easily compared
Export and import transactions within the Euro area are carried out without
exchange risk, and cross border investment and cross border mergers have
increased.

18. THE MANDATE OF THE EMU
Thus the traditional German preoccupation with prevention of
inflation is spelled out explicitly, as well as the Emphasis of
throughout the provisions on EMU on curbing budget crisis.
No other criteria is spelled out in out in the Treaty, Maastricht
thus rejects the Keynesian belief that inflation(unless excessive)
is normal companion economic growth.

19. THE EUROPEAN CENTRAL BANK AND THE POLITICIANS
Primary objective of ESCB to maintain price stability, states
“ESCB shall support the general economic policies in the
Community” and also the basic task of ESCB is “ to conduct
foreign exchange operations consistent with the provisions”.
The ECB did not respond to the pressure to cut interests rates,
but some observers believe that fear would do so led to the
beginning of the slide in the value of the euro.

20. THE EMU AND THE MEMBER STATES
What would be the responsibility of the European Union and its
Member States if a sudden economic downturn hit one of the member
states only? Would the other member states, or the ECB, be obligated
to help the state in trouble?
Answer : Article 104b[103](1) seems to say No. The community shall
not be liable for or assume the commitments of central government
….or public undertakings of any member state. A member state shall
not be liable…except in the case of, mutual financial guarantees for the
joint execution of the specific project.

21. THE EMU AND THE INTERNATIONAL MONETARY SYSTEMS
The question of voting and membership of the IMF was not
easy. Article II of the Article of Agreement of the International
Monetary Fund provides that the memberships shall be open
to countries and the European Union is not a country. Also the
member states of the EMU were not keen to yield their
Memberships in the IMF.

22. THANK YOU !!