It was initiated in 1979 under then President of the European Commission Roy Jenkins [citation needed] as an agreement among the Member States of the EEC to foster monetary policy co-operation among their Central Banks for the purpose of managing inter-community exchange rates and financing exchange market interventions.
[4][5] The ERM let exchange rates to fluctuate within fixed margins, allowing for some variation while limiting economic risks and maintaining liquidity.
[3][1] The EMS officially entered into force on 13 March 1979 with the participation of eight Member States (France, Denmark, Belgium, Luxembourg, Ireland, Netherlands, Germany and Italy).
For example, the Dutch guilder remained quite stable with respect to the Mark, the Italian lira exhibited a sharp downward trend throughout the life of the EMS, and the French franc, the Belgian franc, the Danish krone and the Irish pound all escaped trends of successive devaluations to emerge more stable.
[17] During the first period, from 1979 to 1986, the EMS allowed member countries a certain degree of autonomy in monetary policy by restricting the movement of capital.
[citation needed] In 1988, a committee was set up under EEC President Jacques Delors to begin changing the EMS to provide favorable starting conditions for the transition to Economic and Monetary Union (EMU).
The opt-out of Denmark from the EMU in 1992 and exchange rate adjustments of the currencies from weaker countries by the EMS also contributed to the crisis.
[19] Speculative attacks on the French franc during the following year led to the Brussels compromise in August 1993 which broadened the fluctuation band from +/-2.25% to +/-15% for all the participating currencies.
[7] The German central bank reduced interest rates and the UK and Italy were affected by large capital outflows.
[21] Both nominal and real interest rates increased substantially after 1979 and EMS provided little benefit to its members in terms of monetary and financial stability.
[21] Additionally, Axel A. Weber (1991) claims that the EMS was a de facto Deutsche Mark zone.
Moreover, it was often called “tying one's hands” because the policy adopted a fixed exchange rate which had short-run effects.
[further explanation needed] The German central bank independently chose its monetary policy whilst all remaining EMS member countries' hands were tied on monetary policy and they were simply forced to target their exchange rates to the German mark.