What is the European Monetary System? The exchange rate system within the European Monetary System is not completely fixed, and the currency exchange rate between member countries has a range of fluctuations. The currency of each member country has a central exchange rate with the European Currency Unit (ECU), which fluctuates in the market by plus or minus 2.5%, or 6% for the British pound .
Since the mark is the strongest currency in the European monetary system and one of the most important transaction currencies in the international foreign exchange market, people often take the fluctuation of the exchange rate between the currencies of the member states of the European monetary system and the mark as a sign of the central bank’s intervention in the foreign exchange market. There is an upper and lower limit for the fluctuation of the exchange rate of each member country’s currency against the Deutsche mark . If the upper and lower limits are exceeded, the central bank of the relevant country must intervene. Since sterling and lira have already withdrawn on September 16, the exchange rate fluctuations against the mark will be determined when they return to the European monetary system.
The way the central banks of the member states of the European Monetary System intervene in the foreign exchange market is that each member state transfers 20% of its gold and dollar reserves to the European Monetary Cooperation Fund, and exchanges the corresponding number of European currency units in return. If the central bank of a member country needs to intervene in the exchange rate of its own currency against the mark, it can use the European currency unit or other forms of international reserves to buy its own currency from the central bank of another member state, thereby intervening in the foreign exchange market.
According to the regulations, if the exchange rate of any two currencies between member countries fluctuates beyond the specified range, the central banks of the two countries are obliged to intervene, and the costs of intervention should also be shared. But this is not necessarily the case. Because in most cases, when the exchange rate between the currency of a member country and the mark is close to the upper or lower limit, the central bank of that country will often be alerted and intervene directly. Germany is under no obligation to intervene. However, it is also possible for the central bank to shift the burden of intervention, but it will not be repeated here.