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The European Monetary System (December 6, 1978)

In this speech to the Bundestag, Chancellor Helmut Schmidt, one of the architects of the European Monetary System, explains why the system was established and how it differs from the previous “currency snake” implemented in 1972, following the collapse of the Bretton Woods System.* The original “currency snake” was intended to maintain stable exchange rates between EC member states by preventing exchange-rate fluctuation of more than 2.25%. Its larger objective was to encourage convergent monetary policies among EC member countries. Experience would show, however, that fixing nominal exchange rates alone was not enough to achieve this. The snake remained a feature of the European currency system until January 1, 1979, at which point the European Monetary System described by Schmidt was implemented. The European Currency Unit [ECU] was introduced as part of the European Monetary System.

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Policy Statement by Federal Chancellor Helmut Schmidt on the Results of the Session of the European Council in Brussels, December 6, 1978

[ . . . ] Yesterday in Brussels, following the complicated work of the past weeks and months, all nine member countries [of the European Council] arrived at a joint decision to introduce the [European monetary] system on January 1, 1979. The texts were published last night and will be available to the Bundestag shortly.

This European Monetary System, as I have said previously, aims to introduce a higher degree of monetary stability, both between the individual currencies and for each individual currency domestically. One can say that it is a fundamental element in a more comprehensive strategy directed toward sustainable growth with price stability, a stepwise return to full employment, and the reduction of regional disparities.

This common monetary system will facilitate economic policy convergence within the Community and give new momentum to the [unifying] process of the European Union. We also expect, however, that this system will have a stabilizing effect on international economic and monetary relations beyond the borders of the Community. In this respect, it will doubtless lie equally in the interest of both industrial and developing countries alike.

When I say that nine countries arrived at this decision jointly, it should be emphasized that three of them have reservations about participating in a particular aspect of the system. As expected, the United Kingdom declared that it is presently unable to participate in the common exchange-rate and intervention mechanism. The Italian and the Irish governments have declared that they need some time to consult their cabinets and the political forces supporting their governments at home to determine if they can participate in the common exchange-rate and intervention mechanism starting on January 1. We anticipate receiving statements by these two governments in the course of the next week. [ . . . ]

The unforeseen divergence of the currencies, which had not been taken into account when the Common Market was constructed, has produced a number of risks. We have tried to counter them with the currency group referred to as the “snake,” a name that is virtually incomprehensible to anyone who is not a historian. It was possible to implement this even within a relatively small group of EC member countries. Those who did not participate in this “snake” currency group have not fared well all the time.

* The Bretton Woods System was an international monetary regime that took its name from the New Hampshire town where it was set up in 1944. It sought to stabilize the international monetary market by fixing exchange rates. The U.S. dollar was the reserve currency of choice; in turn, the price of gold was fixed at $35 U.S. The Bretton Wood system started to break down in 1971 but remained in force until 1973. Whereas the Bretton Woods system was an international system (the communist countries refused to participate), the “currency snake” devised in 1972 applied only to the currencies of the original six (and after 1973, nine) EC member countries – eds.

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