European Monetary System (EMS)

Posted in Finance, Accounting and Economics Terms, Total Reads: 57
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Definition: European Monetary System (EMS)

European monetary system (EMS) was set up in 1979 with an aim to combine the currencies of the European countries to reduce the trade barrier due to currency fluctuations and stabilize those changes and carry out efficient trade in the European corridor.


Before the European monetary system it was difficult to carry out trade with inter European countries as each countries had their own currencies and accepted that for trade, so because of this the importer country had to get its currency converted to that of the exporter country to clear of the payment of trade. This lead to a huge friction in the trade because the countries used to lose a huge amount of their currency in currency exchange due to fluctuating values along with the premium to be paid to custodian banks for conversion.


With the formation of European monetary system the conversion became simple a European currency unit was used as a reference for exchange rates and its rates were pegged with that currency unit and was allowed to fluctuate in a range. This eased the movement of trade among the European countries.


But still there was no single currency that can act as an anchor for trade so along with the currencies European monetary system and the stronger economies tried to dominate the European monetary system so to keep the interests of other countries ,the committee of EMS with time decided to align the monetary system of the European countries and let there be only a single monetary system of all these countries which may regulate the currencies. So this led to the pioneer of European Monetary Union (EMU) and European Central Bank in 1999 which led to the generation of a unified European currency known as Euro.

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