Question

Outline the development of the European Monetary System. Why did it develop?

Answer 1

The development of the European Monetary System:

The European Monetary System (EMS) was founded in 1979 after the collapse of the Bretton Woods Agreement of 1972, which was  meant to help increase the economic and political unity in Europe and make way for a future common currency, the Euro.

It was developed to stabilise inflation and to prevent large currency fluctuations between the European countries.

The European monetary system established a system, of linked currencies to bring about stability and prevent large fluctuation in inflation. So, it's main motive was to bring about monetary stability in Europe. In he EMS, member countries collectively manage their exchange rates. The band for exchange rate fluctuations was widened to a maximum of plus or minus 15%. Central banks are allowed to intervene in the forex market to keep the market exchange rate within the band. On January 1, 1999, 11 of the 15 European countries adopted the euro as their common currency.