Question

Summarize and discuss the history of the exchange rate and currency arrangements in Europe since 1973. In particular, the European Monetary System and the creation of Euro.

PLEASE BE THOROUGH WHEN SUMMARIZING AND DISCUSSING

Answer 1

On 1 January 1999, the euro became the single currency of eleven EU Member States, thereby replacing the different national currencies at the respective irrevocably fixed conversion rates. The Member States concerned ceded their monetary policy powers to the European System of Central Banks. The participating Member States thus lost their competence to decide on monetary and exchange rate policy issues, and hence also to conclude monetary or exchange-rate agreements with third countries. Such agreements have now come within the exclusive competence of the Community as far as they relate to the euro.

Until the 19th century, money was almost exclusively metallic (mainly gold and silver). There were many more currencies than today but their value was basically determined by their metal content. With the arrival of the modern nation-state – Money and countries started to be identified with each other. Gold Standard was suspended with start of the First World War, Countries attempted to revert back to the gold standard but no agreement on how to set conversion rates to gold. Bretton Wood conference in 1944 established the post-war international monetary order: – U.S. dollar became lead currency: dollar tied to gold at a fixed rate, all other currencies tied to the dollar – Exchange rates were fixed but adjustable to avoid major misalignments. The end of Bretton Woods came in 1973.

Failure of early stabilization attempts led the establishment of the European Monetary Union (EMS ) in 1979 – As before, grid of bilateral fixed exchange rates, but also possibility for regular realignments. Treaty of Maastricht had been signed and ratified (1991-1993) which foresaw establishment of a monetary union