MBA (General)IV – Semester, International Business Unit 1
Definition of Objectives of the European Monetary System and EMS vis-à-vis Balance of Payments (BOP)
The primary objective of the EMS is to promote and enhance monetary stability in the European Community.
Objectives
of the European Monetary System
The primary
objective of the EMS is to promote and enhance monetary stability in the European Community. Its other
objectives include working towards the improvement of the general and economic situation f the countries of the
European Union in terms of growth,
full employment, standard
of living, reduction
of regional disparities, etc. Above all, it
also aims at bringing about a stabilizing effect on international economic and
monetary relations.
EMS vis-à-vis Balance
of Payments (BOP)
The formation of
EMS has the following implications for countries having surplus balance of payment.
First, the countries
dealing with member countries of the European Union may weaken the pace of
appreciation of their currencies. This is likely to happen as the relative stability of exchange rates
inside the EMS is expected to avoid the distortions between various currencies of the European Union. Second,
deceleration in the rate of appreciation
of currencies may step up exports of such countries. Increased exports, obviously, have salutary effects on the
profitability of enterprise on the one hand and higher growth of their economies on the other.
This assertion is based on the fact that the surplus countries faced negative
effect of continuing re-evaluation (appreciation) of their currencies, vis-à-vis, and the currencies of the member
countries of the European Union (EU).
In particular, the effect was more marked on external trade with the EU as it constituted 40-50 percent of their total external business.
In the case of the deficit BOP situation, the EMS stipulates that the country concerned would be required to initiate appropriate economic and monetary policy measures to overcome their BOP problems. The EMS has the provision of providing assistance as well as short-term monetary support for the purpose.
