The European Monetary System and the International Monetary System

The article examines first the European Monetary System (EMS) experience and whether it can be applied to the International Monetary System (IMS). The EMS has particular features: it is not simply a regional Bretton Woods, and it also has a dimension going beyond the monetary field. Countries participating in the EMS exchange rate mechanism (ERM) have achieved a substantial reduction in exchange rate variability and a high degree of convergence toward cost and price stability. On a worldwide scale, things would be different: general political events have great influence on exchange rates, and large capital shifts are more likely. Whether the same degree of convergence of monetary policies can be achieved worldwide is doubtful. In the absence of a common political interest in integration, short‐term and domestic policy considerations will probably dominate policy decisions. In the second section the article addresses the relationship between the ERM currencies and the US dollar. There have been suggestions for a ‘common dollar policy’. However, advance agreement on a common policy is difficult to imagine, in view of the differing interests of individual ERM countries, as well as the United States. The main problem for the relationship between ERM currencies, the dollar, the yen, and pound sterling lies in the need for more convergence of developments and compatibility of policies. The achievements of the EMS do not lead to the conclusion that a system of stabilized exchange rates would work satisfactorily on a worldwide scale. A high degree of policy co‐ordination, not only of monetary policy, but also of other economic policies, would be needed.