created in response to specific needs such as oil price increases, and the Special
Emergency Fund created by the General Agreement to Borrow (GAB).
The IMF exercises a firm surveillance on the exchange rate policy of the member states
and adopts specific principles to guide them. In order that the system of exchange rate be
effective, the Fund recommends adoption of an anti-inflationary policy.
- European Monetary System
The European Economic Community (EEC) established in 1957 with objectives of (i) a
Customs Union, and (ii) free movement of goods, manpower and capital.
In 1978, European Monetary System (EMS) was established.
1) To promote and enhance monetary stability in the European Community.
2) Working towards the improvement of the general and economic situation
of the countries of the European Union in terms of growth, full
employment, standard of living, reduction of regional disparities, etc.The following are the characteristics of EMS :
- There is a single uniform monetary unit of the European Union.
- A stable but adjustable exchange rate has emerged.
- European Currency Unit (ECU)
The ECU is the central element of the EMS. It is a basket composed of different
currencies of the European Union, weighted according to the economic strengths of each
one of them. Another important premise is that central banks of parties to the EMS are
required to defend the fluctuations in the exchange rates of their currencies.
The ECU is a unit of payment among central banks of the European Union. It is also
used for according financial assistance to member states which face economic difficulties
due to BOP. ‘Private ECU’ has also found a greater reckoning in the market. It is treated
by banks as a currency and all monetary instruments (such as, long-term borrowings and
inter-bank credits, short-term commercial paper, Euro-bonds, Euro-credits, etc.,) can be
documented in ECU. There exist future contracts in ECUs too.
In the international capital markets, the ECU occupies an important place. On the
commercial plane, some enterprises have adopted it as the currency of billing; the
accounts of some multinationals are made in ECUs.
The exchange mechanism is founded in maintaining, through repeated and compulsory
interventions on the exchange market, the bilateral fluctuation limits of the participating
currencies. Each currency has a pivot rate fixed in ECUs.