Criticism of the European Monetary System

Under the European Monetary System, exchange rates can only be changed if both member countries and the European Commission agree. This unprecedented move attracted a lot of criticism. Significant problems in the foundational policies of European Monetary System became evident following the Great Recession.

Certain member states—Greece, in particular, but also Ireland, Spain, Portugal, and Cyprus—experienced high national deficits that developed into a European sovereign debt crisis. Because they did not control their own monetary policy, these countries could not resort to currency devaluation to boost exports and thus their economies. Nor did rules permit them to run budget deficits to reduce unemployment rates.

From the beginning, the European Monetary System policy intentionally prohibited bailouts to ailing economies in the eurozone. Amid vocal reluctance from EU members with stronger economies, the European Economic and Monetary Union finally established bailout measures to provide relief to struggling peripheral members.

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