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Describe European Monetary System

Describe the arrangements & workings of the European Monetary System (EMS).
EMS was launched in the year of 1979 in order to (I) set up zone of monetary stability in Europe, (ii) coordinate exchange rate policies against non-EMS currencies, and (iii) pave the way for the eventual European monetary union. The basic instruments of EMS are the European Currency Unit (ECU) and the Exchange Rate Mechanism (ERM). Such as SDR, the ECU is a basket currency constructed like a weighted average of currencies of EU member countries. The ECU works as the accounting unit of EMS and plays significant role in the workings of the ERM. The ERM is the process by which EMS member countries manage their exchange rates. The ERM is depending on a parity grid system, along with parity grids first calculated by defining the par values of EMS currencies in terms of the ECU. If a country's ECU market exchange rate diverges from the central rate by as much as the maximum permissible deviation, the country has to adjust its policies to maintain its par values relative to other currencies.

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