Abstract

Some Critical Observations on the European Monetary System

There is nothing new about the European Community’s efforts to attain a common monetary policy. The start of the European Monetary System (EMS) on March 13, 1979, initiated the final phase in this development. The European parity-grid-system - the socalled snake - already set up in 1972 has clearly placed its stamp on the new system. However, the following important changes must be stressed: The introduction of the ecu as a unit of account and a yardstick, and also as a means of payment; the incorporation of the socalled divergence limit in the band concept; the considerable expansion of the credit mechanisms with simultaneous prolongation of credit periods and enlargement of the group of participating countries. In any case, it is clearly evident that the system is substantially more complicated than the snake. The lacking lucidity, however, cannot hide the weaknesses of the European Monetary System: First of all, considering things from a national viewpoint, the additional disturbance factors must be pointed out, which may have consequences for a consistent monetary policy in general and for a monetary growth strategy in particular. Over and above this, however, a number of more speculative arguments can be advanced concerning the possibilities of a money-supply policy harmonized at EC level, which under certain circumstances might give grounds for a less negative judgment of the EMS. So far, insufficient attention has been given to the transfers included in or linked with the EMS. Without these components, the system would hardly have been approved and started up. Apart from the public finance and capital market consequences of open transfer of resources, also the hidden interest subsidies connected with the credit mechanisms are involved. These payments must be regarded as anticipation of a European fiscal adjustment system, the configuration of which is not yet discernible. Conjectures that the prime object in creating the EMS was attainment of these additional financing possibilities would seem to be not entirely unjustified. Over and above its significance for monetary policy and public finance, the new system has more far-reaching political implications: On the one hand, there are the relations between government and central bank to be considered, from the national standpoint. But also the prejudicial effects must be taken into account, which might be carried over from the EMS to a European central bank still to be established. On the other hand, the credit operations with their fiscal adjustment character, which in the final analysis were initiated by the executive on its own responsibility, have a de facto impact on traditional parliamentary budgetary rights. The criticism voiced with respect to a number of arrangements and agreements in the EMS leads to the conclusion that the responsible politicians should reappraise the rationality of the monetary system. Macroeconomically and politically it would be fatal for the European Community, if the EMS were interpreted predominantly as a financing system and the Community were to degenerate eventually into a financing community for emergencies.