The European Monetary System (EMS) has just celebrated its ninth birthday. Increasingly, neglect of its experience and scepticism regarding its ability to survive have given way to admiration for its success and a desire to explain its resilience.

During the lifetime of the EMS, the world economy has passed through a period of exceptional instability, with large swings in the main currencies' exchange rates and rapid disinflation, together with the build-up of unprecedented imbalances in the leading countries' external payments. While severe strains have occasionally arisen, the EMS has on the whole been remarkably successful in resisting exchange-rate variations when these were not warranted by fundamentals, managing central-rate realignments (relatively) smoothly, and fostering the convergence of inflation performances.

Two other factors have contributed to an enhanced interest in the EMS. Firstly, there seems now to be some consensus of opinion that exchange rates, even for the leading currencies, need to be managed and cannot be left entirely to market forces. Second, there is an increasing perception within the EMS that the system may be entering a new phase, in which members accord lower priority to disinflation among their policy objectives, capital controls are lifted, and the weakness of the dollar persists: all combine to weaken the cohesion of the EMS.