The Response of Europe to the Collapse of Bretton Woods.ppt

The Response of Europe to the Collapse of Bretton Woods From the EMS to the EMU U.S. Dollar Crisis, 1977-1978 During the years 1977-78, overly expansionary monetary policy in the United States leads (again) to increasing rates of inflation and a deterioration of the U.S. balance of payments. Again, the dollar comes under attack again. From early 1977 to October 1978, the dollar lost 20% of its value. In Europe, in response to this foreign exchange market instability, 9 European countries establish the European Monetary System (March 1979) The goal of the EMS is to promote exchange rate stability within this European group. German Mark: 1973 - 1978 The EMS and Time Line to the Euro March 1979: The European Monetary System agreement called for: The original 9 European currencies to be pegged to one another, thus in essence establishing a fixed exchange rate regime amongst these countries. Countries set up the ECU, which is a basket of these 9 currencies. The UK joins the ERM in October 1990. In reality, all ERM members are linked to the German mark and to Germany’s monetary policy. February 7, 1991: Maastricht Treaty signed (in the Netherlands). This treaty calls for the adoption of a “single” currency, and a single central bank, in Europe by 1999. Countries becoming part of the single currency area needed to meet specified economic and financial criteria before they could adopt the single currency. Some countries were given an “op-out” option, with the U.K. in particular, electing not to join. The Euro Time Line January 1, 1999. The European Monetary Union (EMU) is officially created. With the EMU: Eleven countries “irrevocably lock” their national currencies to the single currency, the euro. These “locked” rates were based on the exchange rates between these national currencies on January 1, 1999. For example: 1,936.27 Italian lira = 1 euro; 1.95583 German marks = 1 euro, etc. The euro starts trading on foreign exchange markets on this date January 1, 2002.