Regional exchange rate arrangements in a world of floating rates: The experience of the EMS

This paper reviews the economic and monetary impacts of the creation of the 1979 European Monetary System on the participating countries and shows that they did not meet all the required theoretical criteria for a successful monetary integration process. Despite this handicap, the 1979 monetary arrangement has succeeded in stabilizing nominal exchange rates and in fostering a move towards a greater co-ordination of monetary policies between some participating countries. On the other hand, the stabilization of nominal exchange rates was accompanied by a lasting decline in the competitiveness of some member countries with a consecutive weakening effect on their economies. However, the relative deflationary impact that was anticipated by some authorities at the outset for the monetary union as a whole has not yet materialized.