BRIFT HISTORY OF THE EUROPEANS MONETARY SYSTEM AND ITS EVALUATIONSTO TALK ABOUT THE HISTORY OF THE EUROPEAN MONETARY SYSTEM WE HAVE TO START FROM THE INTRODUCTION INTERNATIONAL MONETARY SYSTEM TO THE BRETTON WOOD SYSTEM.An International Monetary System is essential to incentive economic transactions, giving different countries the condition to participate effectively in the exchange of goods and services, stimulating their development as trade leads to a rational use of resources and higher consumption possibilities. To be effective, an international monetary system requires an efficient balance of payments adjustment mechanism so that deficits and surpluses can be eliminated in a short time.Before World War I, the prevailing international monetary system was the international gold standard. Gold constituted the international reserve asset and its value was fixed by the declared par value that countries specified. This condition to relate currencies with an internationally acceptable reserve asset (gold) helped contribute to relatively free trade and payments.With the advent of World War I, this standard broke down and in 1920 countries permitted a great deal of exchange rate flexibility. In the middle of that decade, Britain attempted to restore the gold standard, adopting the old prewar par value of the pound. That par value greatly overvalued the pound and caused payments difficulties for Britain. With the tremendous decline in the economic activity in the 1930s, payments difficulties emerge for many countries. Governments desperate to find foreign buyers for domestic products, made them appear cheaper by selling their national money below its real value, to undercut the trade of other nations selling the same products. This practice known as competitive devaluation merely evoked retaliations through similar devaluation by trading rivals. Because of uncertainty about the value of money, nations hoarded gold and money that could be converted into gold, further contracting the amount and frequency of monetary transactions among nations. These various actions led to great reductions in the volume and value of international trade. The measures also most likely worsened the Great Depression, and the low level of economic activity continued throughout most the 1930s. Economic activity spurted upward with the advent of World War II, but involvement in the war prevented comprehensive consideration and adoption of a new system of international paymentsBRETTON WOOD SYSTEM- Bretton wood system of 1971 was the first system used to control the value of money between different countries,it mean that each country had to have a monetary policy that kept the exchange rate of its currency within a fixed value plus or minus one percent in terms of gold,it was the first monetary order that organized monetary relations among independent nation states.So after the demise of the Bretton wood system in 1971 most of the European Economics communities (EEC) agreed in 1972 to maintain a stable exchange rates by preventing exchange rate fluctuations of morethan 2.2%(European currency snake),in march 1979 this system was replaced by the European monetary system (EMS)The European monetary system (EMS) was an arrangements that was built and established in the year 1979 for the purpose as following points such as follows1)Firstly to stablize the exchange rates among the then European community(EC) which is now known as European union memebers countries whom had wished to participate on it ,2) The European monetary systems came about due to high global inflations and economic stagnations that characterized much in the 1970s,the American dollar (usd) which had served as a peg for the Europeans currencies was affected by a ballooning American deficit,also the oil crises,a rapid rise in the demand for gold in world commodity market also with unemployement and stagflation at home.EXCHANGE RATE- This is a particular the value of one country currency in relation to the currency of another country,or other countries.The currency exchange rate of the European community (EC) members states had fluctuated higer against the American dollar(usd) because of the high domestic demands which refused to devalue, as a result the central banks of most western European countries in effort to stable their own currencies which were unable to purchase the inflationary American dollar(usd) which led to a negative thought against dollars here by driving its value down even further. European community (EC) members states were increasing unabled to solve about this finanacial problems and that was the reason that gave birth to the European monetary system which was out of fear that these monetary problems would spoil their future plans for the European economic integration.So the main primary purpose of the European monetary systems (EMS) was to stable the currency exchange rate among all the participating European countries and here by also protecting each members currency from the fluctuating American dollar(usd) and also this happen because of due to the weaknesses in American fiscal policy then. another important role of the European monetary systems ( EMS) was the introductions of the European currency unit (EC), which acted as a link or plaform in which leads to the final establishments of the single euro currency.The European currency unit( ECU) are responsible in determining the fate of exchange rates among the participating European community countries currencies through a centralized sanctioned accounting systems model. the early years of the European monetary system (EMS) were marked by currency values with adjustement that raised the values of stronger currencies and lowered those of weak ones,However after the year 1986 changes in national interest rate were specifically used in keeping all the currencies more stable,EXCHANGE RATE MECHANISM (ERM)- One of the most important part of the European monetary system was to keep their currency exchange rate with bands which meant that no country exchange rate could fluctuate more than 2,25% from central point.this was actually established to help maintaining a stable commerce without fear of contradiction in such a way that a sudden changes in currency value will affect the trade and so therefore its would encourage the development of trading barriers among the European community member states.European currency unit (ECU) was created during the process mainly to be used as a unit of account .although not a real currency the ECU became the idea of creating a single currency an idea that was realised with the lunch of the euro in 1999,so the exchange rate were to be pegged to an European currency unit, which was also backed by pooling specified amount of members national currency,the amount of currency deposited by each member countries were related to the economic strengths of that country,so this system mutually fixed exchange rates between these countries. In the year 1994 the European union(EU) established an European monetary institute in order to transit to the European central bank(ECB) which was also established in 1998 of which its primary responsibility or goals was to establish a single monetary policy and interest rate working with National Banks also including introducing the single EURO common currency,the European central bank( ECB) is also responsible for the controlling and managing inflations.Before the end of the year 1998 most of the countries in the European Union nations cut their interest rates so that it would be easier for them to promotes economic growth and prepare for the implementation of the euro,EMS was substantially weakened but still alive• With In the meantime, Treaty of Maastricht had been signed and ratified (1991-1993) which foresaw establishment of new monetary union known as (EMU )and the European economic and monetary union (EMU) was then established succeeding the European monetary system as the new name for the common monetary and economic policy of the European union and the euro was fully adopted and brought into circulations by the European Union memeber states,EUROPEAN CENTRAL BANK(ECB)The European central bank was establsihed in the 1998, its functions as the central bank for the entire Eurozone. It defines monetary policy for all countries within the Eurozone and manages Europe’s single currency.The ECB operates completely independently of all European governments.IT REGULATING THE ECONOMY AND PRICESThe ECB’s primary objective is to “maintain price stability”, while supporting “the Union’s general economic policies”.For the ECB, the objective of maintaining price stability translates in reality to an increase in prices close to, but under 2%.To do so, the central bank adjusts the benchmark interest rate, which is the rate at which commercial banks can borrow from the central bank. Lowering the interest rate stimulates greater consumption, which in turn initiates a trend towards higher prices. Conversely, raising the interest rate slows down consumption and prices.Exceptionally, the central bank can also change the amount of currency in circulation. It is generally considered that excess currency can lead to inflation, while an insufficient amount can restrict economic growth.The primary objective of the European System of Central Banks … shall be to maintain price stability.IT MANAGING AND COORDINATING THE EUROZONE The ECB also works to:Define and implement monetary policy in the EurozoneConduct foreign exchange operationsHold and manage the official foreign exchange reserves of each countryIssue bank notes in the EurozoneCollect and centralize statistics from national authorities and economic agentsAudit credit institutions in member StatesNATIONAL CENTRAL BANKS AND THE ECB: who does what?The ECB defines policies for the Eurozone. It ensures that the different national central banks carry out decentralized operations in a consistent way.The national central banks are responsible for performing monetary policy operations in their respective countries. They carry out the actual transactions, supply currency to commercial banks, manage foreign exchange reserve operations for the ECB as well as their own foreign exchange reserves and contribute to the proper functioning of financial markets and payment instruments. They mint coin currency. Depending on the country, they may also perform specific functions attributed on a country-by-country basis: for example, the Bank of France performs special debt assistance activities.The ECB is not obligated to act as a lender of last resort but large integrated economies such as the European Union need to berunning smoothly, because other countries around the world might be dependent on that stability. Should a bank run into problems that require it to borrow, and that borrowing cannot be satisfied in private markets, the ECB may find that making credit available to that bank is preferable to allowing the instability that might result from insolvency.By not being required to act as lender of last resort, the ECB has theability to exercise judgment concerning which banks should be supported and which might be beyond help. EUROPEAN UNION COUNTRIES THAT USES EUROThe following 19 Countries within the Eu zone uses euro as thier single currencyAustria Belgium cyprus Estonia France Finland Germany Greece Ireland Italy Latvia Luxembourg Lithuania Malta Netherland Portugal Spain Slovenia slovakiaEVALUATION OF THE EUROPEAN MONETARY SYSTEMThough the European monetary system has leads to the introduction of euro single currency which has then been used by the eurozone hereby reuducing transaction cost and increasing the number of trade integrations within the regions and making travel easy too, but some of the European monetary policy became evidence that certain countries in the eurozone such as Greece,Portugal,Spain in particular has experience a national deficits that went on to become an Europe sovereign debt crisis which without its national currencies this countries could not be able to devaluate their currency since they have given up their national currencies and are now using a shared single currency (euro) with other european countries making it imppossible for them to control their monetary policy since is a shared system with other european countries and they were also not allowed to spend in order to offset their unemployement rates in their countries, all this makes it impossible for such countires to improve since they cant control or adjust their monetary policy or even to devaluate their money.Secondry right from the begining of the establishment of the European monetary system its original policy previously intentionally prohibited the beailout clause from other rich european countries to assisting the ailling poor economies countries in the eurozone such as countries like Greece,Spain,Portugal which are experiencing economic harship in the European union (EU) membership which later the European monetary union (EMU) finally established a bailout clause measures to provide a relief to economically struggling European community members, In the year 2012 the European stability mechanism a permanent fund to aid the struggling economies to European union members nations was implemented across the European union (EU),with new bailout measures and mandated austerity measures in the afflicted countries several economies such Ireland,Portugal and Spain had managed to be solidly recovering but however Greece continuing been stagnated in its economic recession,political strife and rampant unemployement rate continued in 2015,which make many to think that Greece participations in the eurozone membership remains uncertain which revealing one of the weakness of the original European monetary system policy in terms of the true European fiscal and political unit.so this make it very difficult for some of this countries with economic difficulty to adjust their economy or devalue their national currency through monetary policy since they now used a shared monetary policy and euro currency which is now control by the European central bank(ECB) IN Germany here by making it much difficult such countries to recover economically