Mechanism of European foreign exchange rate

The mechanism of European foreign exchange rate , or MCE , is a mechanism of Foreign exchange rate introduces by the European Community in 1979 intended for statibiliser the courses of the European currencies, to prevent the exchange rate risks and to increase confidence in the currency in the medium and long term, to suppress inflation and to develop the trade and the activity in the intracommunity zone.

Initially named “European Monetary System,” it was revised considerably in its operation by the treated of Maastricht ratified in 1992 founding the European Union, for the preparation with its economic Union and monetarist and his future single currency.

Since the introduction of the Euro on January 1st 1999, it was revised and replaced by MCE and consists of an agreement between the Conseil ECOFIN joining together all the Member States of the European Union, the European Central bank and the national central banks of the Member States of the European Union not belonging to the Euro area.

European Monetary System (SME) with the MCE

See also: European Monetary System

The European Monetary System (EMS) was introduced in March 1979, to replace the preceding systems which had failed (like the snake or the monetary tunnel ), in order to reduce the variability of the Foreign exchange rate in Europe and to reach a certain monetary stability, more favorable to the introduction of a future single currency (the Euro whereas was not considered). The system created a theoretical monetary unit, the ECU, based on a basket made up of each European currency (also allowing to calculate and distribute the European budget) and founded a solidarity of the European countries as regards support of the courses, around a value pivot calculated according to the evolutions of each currency compared to the common unit.

However, the system preserved big parts of maneuvres, each central bank preserving its own rules of operation (with often a direct intervention of the States on interest rates, the management of the public deficits, the exemptions tax, the excessive granting of guarantees of the State for the Emprunt S and the assistances with the Exportation and monetary creation via long-term loans, whose Intérêt S weigh increasingly heavy on the national operational budgets and the economic activity slowed down by a constant rise of the Fiscalité and the reduction of the treasury necessary to the investments).

The signature of the treated of Maastricht in 1992 completely changes the operation of the European Monetary System, by founding a European Central bank (ECB), whose installation will take several years necessary to the installation of the total independence of the national central banks until their integration in the ECB, and the application of rigorous national budget policies intended to ensure the long-term convergence of the European economies.

The mechanism of European foreign exchange rate (MCE) indicates before all this new policy installation gradually within the framework of the EMS, in a transitory way, until the introduction of the economic Union and monetarist (UEM); this mechanism will function fully only in the two last years of the EMS in 1998 and 1999 (after the finalization of the statutes of the ECB and the installation of the economic policies and national legislations adapted), i.e. the final period of evaluation of the currencies which would be integrated in the future UEM. It made it possible however to stop the direct interventions disturbing healthy intra-European competition, and to avoid the too frequent recourse in the past to the devaluations of the national currencies like means (increasingly ineffective and inflationary) of starting again the growth and the overseas investments by a rise of interest rates, where the EMS only forced to consult as a preliminary the other partners on the compensations necessary to these devaluations. Thus the MCE founded the true European economic cooperation via the regular meetings of the Ministers for Finance within the Council ECOFIN.

It should be noted that the the United Kingdom took part in the EMS then with the MCE until its dissolution in at the end of 1999. The EMS does not exist any more but certain mechanisms of the MCE remain in application for the United Kingdom in the form of co-operation with the UEM and the respect of certain common objectives defined by the treated of Maastricht, and the obligation for the United Kingdom to contribute to the European budget with accounts established in euros, the only official currency of the European Union.

The last members with the European Union, the Finland and the Sweden took part in the MCE, like all 15 member of the European Union until in at the end of 1999. Finland left the MCE to join the UEM directly. But Sweden did not take the technical measures making it possible to leave the MCE before the introduction of the euro, by adopting those definite for the MCE which would have enabled him to join the UEM, like the treaty obliged to him (contrary to the United Kingdom and Denmark, Sweden does not have any exemption).

MCE

For the Member States not taking part in the European single currency, a second mechanism of foreign exchange rate European, known as MCE , was then installed. During the negotiation of the treated of Maastricht by the 12 members of the EU, and 3 new reaching (Finland, Sweden and Austria), it was expected that all the members of the preceding MCE and all the novel members of the Union adhere obligatorily either to the UEM (if they are eligible), or with the MCE. The MCE ended, but the Sweden (in spite of its signature of the treaty) and the the United Kingdom (which chose to be withdrawn but was authorized not to do it) did not adhere to the MCE. Such exemptions are not allowed any more for the new applicant countries the Union, which must beforehand accept the convergence of their economy and the participation in the MCE (then with the UEM as soon as the conditions are met) with a calendar defined in the Treaty of Accession.

The MCE is based on the euro only, i.e. on the common unit of the only countries having adhered to the euro (and either on the ECU which was calculated on the whole of the currencies of the European Union) and tolerates a variation of 15% around a initial Foreign exchange rate between the national currency and the euro. This reduction of plate for the fixing of extracommunity foreign exchange rates was to also make it possible to stabilize and distribute the European budget on more equitable bases. However, this reduction of plate involved a risk on the fixing of this budget, so insufficiently of European countries adhered to the euro. It was not the case, and almost all the countries of the European Union could adhere as of the launching of the euro, which made it possible to put an end at the same time to the ECU and thus also the MCE (at least officially, certain financial institutions having continued to calculate it until approximately 2001, in the form of an index, but by considering the weight of the euro in the old basket of currencies, although the composition of the euro changed since, as well as the ways of calculating of the contributions to the European budget).

Since the introduction of the Euro on January 1st 1999, the parity between the euro and the old national currencies of the Member States joining the euro became fixed and irrevocable. The other countries having ratified the treaty of Maastricht (or its successors) are committed making converge their economy in order to avoid the distortion economic related to their foreign exchange rate, more not to resort to the devaluations, to let the market fix the course of their currency according to their economic performances. To manage to maintain foreign exchange rates stable around a value pivot defined during adhesion in the MCE, within maximum limits of fluctuation of ± 15%, they follow a common policy of convergence of economic criteria, and a healthy management of their public finances in the short and long term.

These criteria are evaluated by the Council of Ministers of finances of the Union, the ECOFIN, in collaboration with the European Central bank and the national central banks members of the UEM. If the economic criteria of convergence are respected during one 2 years minimal period, the participating States receive the approval of the Council ECOFIN to reach the euro, and their national central bank (BCN) can adhere to the ECB; finally, when this integration is carried out (by the deposit of the signatures of the instruments of ratification and the financial conditions, the approval of the representatives of the BCN and the money supply to convert, and the receipt of the guarantee funds deposited with the ECB), the ECB fixes, in agreement with council ECOFIN, the irrevocable convertion rate between their national currency and the euro, by taking of account last official fixings on the foreign exchange markets and the adjustments calculated on the assets and international financial liabilities of the adherent BCN at the day of the fence.

All the countries aspiring to integrate the Euro area must initially subscribe to the MCE. It was the case for Greece in 2000 and 2001 before its adhesion with the euro. It is already the case of the Estonia, of the Lithuania, the Latvia, Malta and Cyprus, as well as Slovakia since November 2005. By integrating the euro area, the Slovenia left the MCE on January 1st, 2007.

Member States of the MCE

After an official statement of the the Council ECOFIN with Vienna, on September 26th 1998, the participation of the Denmark and Greece with the new MCE is accepted. After the adoption of the euro by Greece on January 1st 2002, only Denmark took part in it.

However, infringement proceedings were initiated by the European commission against Greece, shown to have made up its public accounts as regards budget deficit to enable him to adhere to the euro in spite of the necessary conditions of convergence which were to be maintained during 2 years. This procedure does not call into question its exit of the MCE for its adhesion to the euro. Such procedures were also considered against the France and the Germany (which did not take part in the MCE but in the first MCE), for the going beyond of the objectives of budgetary convergence subsequently to their adhesion with the euro. These procedures do not concern the MCE but the control mechanisms suitable for the UEM.

The Denmark, as a voter against this adhesion, also obtained an exemption opting out enabling him to remain in the MCE without being obliged to adhere to the EMU and the euro; instead of that the limit of fluctuation of its currency in the MCE was reduced compared to the other members. The the United Kingdom (which took part before in the first mechanism of foreign exchange rate of the ex-Community européeenne) obtained an exemption enabling him to remain out of the MCE (and thus also out of the EMU and the euro) as of its creation, even if it observes all the requirements, and its currency (as its policy of interest rate) evolves/moves freely on the markets; however, the United Kingdom must meet certain common economic aims with its other partners of the EU (in particular as regards reduction of the public deficits and fight against inflation, and takes part in the UEM without being part of the EuroSystème). The Sweden should normally have taken part in the MCE, but applies for the moment of unilateral measurements of technical order which avoids to him having to do it in an obligatory way (and thus in the long term to have to join EuroSystème with a preset calendar).

The 10 new Member States which adhered to the European Union on May 1st, 2004 progressively will join the MCE of their preparation to the adoption of the euro, and take part already in the UEM being left EuroSystème. June 27th 2004, the crown Estonia nne, the litas Lithuania N and the Slovenien tolar joined the MCE. May 2nd, 2005, three other States joined the MCE: Cyprus, the Latvia and Malta. The Slovakia followed on November 25th 2005. The Romania and the Bulgaria, which adhered to the European Union on January 1st 2007, must also join the MCE in the long term and will join the monetary Union after at least 2 years of participation and the satisfaction of the criteria of convergence defined in the single treaty. Among these the last 12 States, only Slovenia left successfully in January 2007 there, it will be followed in January 2008 by Cyprus and Malta.

Bulgaria, although having adhered to the European Union and applying a unilateral policy of fixed foreign exchange rate with the euro for several years, has not taken part yet in the MCE, in particular as regards policy of interest rate and adhesion to the objectives of economic convergence (inflation), budgetary (public deficits), policy (independence of its central bank) and of co-operation (support of the courses and the common monetary policy), that such a participation would imply in an obligatory way. It is thus in the same situation as the Romania, or the Poland, the Hungary or the Czech Republic (even if the course of the Bulgarian lev is maintained stabilized compared to the euro). Like these other countries, it can still constantly decide only change of its foreign exchange rate (within the limits fixed by the Treaty of Accession, which makes it possible these countries to preserve this independence during one transitional period of adaptation, while benefitting from the single European market).

Cours pivots

The MCE envisages to maintain the average foreign exchange rate of the currency of a State taking part in the system, in a fork of maximum variation possible around a central course pivot . This course pivot used during the period of participation does not precede the value of the final convertion rate which will be applied when the accession with the euro is confirmed and comes into effect.

Indeed, this final convertion rate, if it must remain in the preset fork (the evening of the day day before of the entry in the MCE), will depend on the final course of the participating currency and the last operations of compensation of engagements on the money markets the last evening when this currency will cease being with dimensions on the regulated money markets supervised by the ECB. However, the courses pivots of the currencies of the MCE are, like the convertion rates of the old currencies converted into euros, defined in both cases by their relative value for 1 euro by Council Decision ECOFIN with an accuracy of 6 significant figures.

One thus should confuse a course pivot of the MCE (single with the purchase as with the sale, lawful but possibly réajustable, which would imply a carryforward of the completion date of participation in the mechanism of exchange) with effective foreign exchange rates for 1 euro (fixed, réajustables or variables according to the monetary policy of the participating State), neither with the real courses (free on the money markets and financial and often different at the same date between the purchase and the sale) nor with a convertion rate into euro (legal, single and final, but non-existent for the currencies of the MCE, and applicable without any expenses of exchange to all transactions within the European Union).

Here the list (sorted in the order of adhesion then of exit to the MCE) of the 16 States of the European Union, non-member initially of the EuroSystème (the 11 other States of the European Union integrated EuroSystème and adoptee the euro as of its creation in 1999, without having to use mechanism MCE, joined later by 2 other States listed here):

See too

the economic article Union and monetarist for the general presentation of the UEM in the European Union (UE) or other monetary unions apart from the EU.
the article European System of central banks (SEBC) for the complete listing of the participating central banks of the European Union with the UEM.
the article EuroSystème for the subset of central banks of the SEBC having adopted the euro.
the article Euro area for a complete listing of the country having adopted the Euro (including the countries out of the EU).
List of the monetary units replaced by the euro

External bonds

the economic policy and monetarist of the EU
Page (in English) of the site of the European Union devoted to the MCE II
Page (in French) of the site of the European Union devoted to the MTC 2 (=MCE II)

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