Ireland joins the new European Monetary System (EMS) on March 13, 1979. The EMS is an arrangement established in 1979 under the Jenkins Commission where most nations of the European Economic Community (EEC) link their currencies to prevent large fluctuations relative to one another.
After the demise of the Bretton Woods system in 1971, most of the EEC countries agree in 1972 to maintain stable exchange rates by preventing exchange rate fluctuations of more than 2.25%. In March 1979, this system is replaced by the European Monetary System, and the European Currency Unit (ECU) is defined.
The basic elements of the arrangement are:
- The ECU: With this arrangement, member currencies agree to keep their foreign exchange rates within agreed bands with a narrow band of +/− 2.25% and a wide band of +/− 6%
- An Exchange Rate Mechanism (ERM)
- An extension of European credit facilities
- The European Monetary Cooperation Fund: created in April 1973 and allocates ECUs to members’ central banks in exchange for gold and US dollar deposits
Although no currency is designated as an anchor, the Deutsche Mark and German Deutsche Bundesbank soon emerge as the centre of the EMS. Because of its relative strength, and the low-inflation policies of the bank, all other currencies are forced to follow its lead if they want to stay inside the system. Eventually, this situation leads to dissatisfaction in most countries, and is one of the primary forces behind the drive to a monetary union.
Periodic adjustments raise the values of strong currencies and lower those of weaker ones, but after 1986 changes in national interest rates are used to keep the currencies within a narrow range. In the early 1990s the European Monetary System is strained by the differing economic policies and conditions of its members, especially the newly reunified Germany, and the permanent withdrawal of the United Kingdom and Italy from the system in September 1992. Speculative attacks on the French franc during the following year lead to the so-called Brussels Compromise in August 1993 which establishes a new fluctuation band of +15%.
In May 1998, the European Monetary System is no longer a functional arrangement as the member countries fix their mutual exchange rates when participating in the euro. Its successor however, the ERM-II, is launched on January 1, 1999. In ERM-II the ECU basket is discarded and the new single currency euro becomes an anchor for the other currencies participating in the ERM-II. Participation in the ERM-II is voluntary and the fluctuation bands remain the same as in the original ERM, i.e. +15 percent, once again with the possibility of individually setting a narrower band with respect to the euro. Denmark and Greece become new members at this time.