Current International Monetary System 1.

European Monetary System Following the collapse of the Bretton woods system on August 15, 1971, the EEC countries agreed to maintain stable exchange rates by preventing exchange fluctuations of more than 2.25%. This arrangement was called "European snake in the tunnel" because the community currencies floated as a group against outside currencies such as the dollar. By 1978, the snake turned into a worm (with only German mark, Belgian franc, Dutch guilder, Danish krone). However, a new effort to achieve monetary cooperation was launched. By March 1979, EC established European Monetary System, and created the European Currency Unit

(ECU). Europea n Prevent movements above 2.25 % Monetar around parity in bilateral exchange y rates with other member countries. System The European Monetary Cooperation Fund allocates ECUs to members' central banks in exchange for gold and dollar deposits. 20% of the quota must be paid in gold. ECU was an artificial currency and used in all intrasystem balance of payments settlements. ECU was replaced by euro (at 1:1) on January 1, 1999. provision of credit facilities for compensatory financing. Then the EMS created the European Central bank (June 1998) and a single European currency (euro

2002). Since its inauguratation in 2002, euro has gained ascendancy and is valued at about $1.46 as of December 2007.

2. Recommended Foreign Exchange Practices As a general rule, small countries should peg the value of their small currencies to a major currency or a countrie baske of major currencies. But there s is little harm in floating their currencies. large/m edium countrie s Countries whose trade shares exceed 1- 2 % of world trade should adopt floating to insulate their economies from excessive foreign shocks. For example, China's export share is about 10%, and it should float yuan.

In the foreseeable future (next five decades), four major currencies (USD, euro, yen and yuan) will float their currencies. India and Russia may follow suit eventually. Large countries may not only hurt themselves but also disrupt world trade when their currencies are pegged to another currency to gain a large trade surplus. Currencies of other industrial currencies are floating with respect to the dollar. Accordingly, the current system is a mixture of exchange rate arrangements. 3. Current Foreign Exchange Practices
Europe

10 European currencies were aligned within margins of 2.25%, but they jointly float again the dollar and others. Irish pound, Italian lira, Luxembourg Franc, German mark, Belgian Franc, Dutch gilder, French Franc, Danish

Krone, Spanish peseta (plus British pound). Italian lira and Spanish peseta have wider margins of 6%. This arrangement was further simplified by the creation of euro, effectively creating the euro area.

Swiss Franc, Canadian dollar, British pound, Japanese yen and the U.S. dollar are floating.

The remaining currencies of LDCs pegged to major currencies or baskets.

Imports of East Asian countries are often invoiced in dollars. For example, about 70% Japan's imports are invoiced in dollars. This dollar invoicing practically expands the dolla area to include Japan and other East Asian countries (Ronald McKinnon).
2002