ABSTRACT
The European Monetary System (EMS) was founded by the Council of Ministers' meeting in December 1978. The ecu, a cocktail of EMS-member currencies, was introduced as a numeraire, and played an important role in the divergence indicator. EMS managers were able to make timely realignments that restored competitiveness even whilst the 'normal' fixity of the nominal rate could be used as an ingredient in counter-inflationary policy. Since the 'counter-inflationary' framework rationalization for the EMS turns on there being an anchor country with a good counter-inflationary record and, therefore, a 'hard currency', distinguishing this rationalization from the cruder picture of the EMS as a 'Deutschmark (DM) Area' is hardly possible. Most economists then agreed that the German unification shock required a revaluation of the DM — or a relative rise in the German price level. The stabilizing effect was found to be strengthening through time as the Exchange Rate Mechanism moved to the realignment-free period.
