European Monetary Union: Theory, History and Consequences
Taras Shevchenko Kyiv National University
Faculty of Economics
Semester Project
European
Monetary Union: Theory, History and Consequences
MA. Amalya Tumanyan
Kyiv 2009
CONTENTS
Introduction
1.
What is the European Monetary Union?
2.
History of the EMU
3.Criticisms
of the EMU
Summary
INTRODUCTION
A monetary union
<http://en.wikipedia.org/wiki/Monetary_union> is a situation where
several countries have agreed to share a single currency amongst themselves.
Economic and Monetary Union (EMU) represents a major step in
the integration of EU economies. It involves the coordination of economic and
fiscal policies, a common monetary policy, and a common currency, the euro.
Whilst all 27 EU Member States take part in the economic union, some countries
have taken integration further and adopted the euro. Together, these countries
make up the euro area.
The decision to form an Economic and Monetary Union was taken
by the European Council in the Dutch city of Maastricht in December 1991, and was
later enshrined in the Treaty on European Union (the Maastricht Treaty).
Economic and Monetary Union takes the EU one step further in its process of
economic integration, which started in 1957 when it was founded. Economic
integration brings the benefits of greater size, internal efficiency and
robustness to the EU economy as a whole and to the economies of the individual
Member States. This, in turn, offers opportunities for economic stability,
higher growth and more employment - outcomes of direct benefit to EU citizens. In practical terms, EMU means:
- Coordination of economic
policy-making between Member States
- Coordination of fiscal
policies, notably through limits on government debt and deficit
- An independent monetary
policy run by the European Central Bank (ECB)
- The single currency and
the euro area
1. WHAT IS THE EUROPEAN MONETARY UNION?
Among the European
states, EMU officially stands for Economic and Monetary Union. Other countries
also use EMU to refer generally to the European Monetary Union. EMU is the
agreement among the participating member states of the European Union to adopt
a single hard currency and monetary system. The European Council agreed to name
this single European currency the Euro. The European states decided that the
EMU and a single European market were essential to the implementation of the
European Union, which was created to advance economic and social unity among
the peoples of Europe and to propel Europe to greater prominence in the
international community.
2. HISTORY OF
THE EMU
The road to EMU
First ideas of an
economic and monetary union
<http://en.wikipedia.org/wiki/Economic_and_monetary_union> in Europe were
raised well before establishing the European Communities <http://en.wikipedia.org/wiki/European_Communities>.
For example, already in the League of Nations
<http://en.wikipedia.org/wiki/League_of_Nations>, Gustav Stresemann
<http://en.wikipedia.org/wiki/Gustav_Stresemann> asked in 1929 for a
European currency against the background of an increased economic division due
to a number of new nation states in Europe after WWI
<http://en.wikipedia.org/wiki/World_War_I>.
Economic and
monetary union was a recurring ambition for the European Union from the late
1960s onwards because it promised stability and an environment for higher
growth and employment.
The road towards
today's Economic and Monetary Union and the euro area can be divided into four
phases:
Phase 1: From the Treaty of Rome to the Werner Report,
1957 to 1970
The international currency stability that reigned in the
immediate post-war period did not last. Turmoil on international currency
markets between 1968 and 1969 threatened the common price system of the common
agricultural policy, a main pillar of what was then the European Economic
Community. In response to this troubling background, Europe's leaders set up a
high-level group led by Pierre Werner, the Luxembourg Prime Minister at the
time, to report on how EMU could be achieved by 1980.
Phase 2: From the Werner Report to the European
Monetary System, 1970 to 1979
The Werner group set out a three-stage process to achieve EMU
within ten years, including the possibility of a single currency. The Member
States agreed in principle in 1971 and began the first stage - narrowing
currency fluctuations. However, a fresh wave of currency instability on
international markets squashed any hopes of tying the Community's currencies
closer together. Subsequent attempts at achieving stable exchange rates were
hit by oil crises and other shocks until, in 1979, the European Monetary System
(EMS) was launched.
Phase 3: From the start of EMS to Maastricht, 1979 to
1991
The EMS was built on exchange rates defined with reference to
a newly created ECU (European Currency Unit), a weighted average of EMS
currencies. An exchange rate mechanism (ERM) was used to keep participating
currencies within a narrow band. The EMS represented a new and unprecedented
coordination of monetary policies between the Member States, and operated successfully
for over a decade.
This success provided the impetus for further discussions
between the Member States on achieving economic and monetary union. At the
request of the European leaders, the European Commission President, Jacques
Delors, and the central bank governors of the EU Member States produced the
'Delors Report' on how EMU could be achieved.
Phase 4: From Maastricht to the euro and the euro
area, 1991 to 2002
The Delors Report proposed a three-stage preparatory
period for economic and monetary union and the euro area, spanning the period
1990 to 1999.
The Delors Report recommended EMU in three stages
The report indicated that this could be achieved in three
stages, moving from closer economic and monetary coordination to a single
currency with an independent European Central Bank and rules to govern the size
and financing of national budget deficits.
The three stages towards EMU
Stage 1 (1990-1994)
|
Complete the internal market and
remove restrictions on further financial integration.
|
Stage 2 (1994-1999)
|
Establish the European Monetary
Institute to strengthen central bank co-operation and prepare for the
European System of Central Banks (ESCB). Plan the transition to the euro.
Define the future governance of the euro area (the Stability and Growth
Pact). Achieve
economic convergence between Member States.
|
Stage 3 (1999 onwards)
|
Fix final exchange rates and
transition to the euro. Establish the ECB and ESCB with independent monetary
policy-making. Implement
binding budgetary rules in Member States.
|
European leaders accepted the recommendations in the Delors
Report. The new Treaty on European Union, which contained the provisions needed
to implement EMU, was agreed at the European Council held at Maastricht, the
Netherlands, in December 1991. This Council also agreed the 'Maastricht
convergence criteria' that each Member State would have to meet to participate
in the euro area.
After a decade of preparations, the euro was launched on 1
January 1999. At the same time, the euro area came into operation, and monetary
policy passed to the European Central Bank (ECB), established a few months
previously - 1 June 1998 - in preparation for the third stage of EMU. After
three years of working with the euro as 'book money' alongside national currencies,
euro coins and banknotes were launched on 1 January 2002 and the biggest cash
changeover in history took place.
3.Criticisms of the EMU
Concerns about the EMU center around loss of national
sovereignty for each of the individual participating states. Some fear that the
participating states may not be able to pull out of a national economic crisis
without the ability to devalue its national currency and encourage exports.
Others worry that the participating European states will be forced to give tax breaks
to compete with each other and that companies may have to lower wages for their
employees and to lower prices on goods that they produce. Because taxes
continue to be levied at the national level and not by the EMU, tax policy
cannot be used as a tool to help individual states that may be experiencing an
economic downturn. In this way, the EMU differs from the United States which
has both a single federal monetary policy and a primarily centralized tax
system. In the United States, the residents of an individual state with a
lagging economy can pay less tax and the residents of another state with a
soaring economy can make up some of the tax deficit. In the EMU, because tax
policy is not centralized, the other states cannot help out an individual participating
state that is economically troubled by shouldering a greater proportion of the
tax burden. Also, because the participating EMU countries vary so much
culturally, the labor force in these countries is not nearly as mobile as
between the states of the United States. Because the labor force is fairly
stationary, problems of high unemployment may persist in certain individual EMU
states while other countries may not be able to fill positions with qualified
employees. Finally, some countries (like the United Kingdom) may fear that
joining the EMU may pull their country down to the economic equivalent of the
least common denominator, saddling them with the economic problems of countries
with a less successful economy.
EMU is the agreement among the participating member states of
the European Union to adopt a single hard currency and monetary system. The
European Council agreed to name this single European currency the Euro.
Economic and monetary union was a recurring ambition for the
European Union from the late 1960s onwards because it promised stability and an
environment for higher growth and employment.
The road towards today's Economic and Monetary Union and the
euro area can be divided into four phases:
- Phase 1: From the Treaty
of Rome to the Werner Report, 1957 to 1970
- Phase 2: From the Werner
Report to the European Monetary System, 1970 to 1979
- Phase 3: From the start of
EMS to Maastricht, 1979 to 1991
- Phase 4: From Maastricht
to the euro and the euro area, 1991 to 2002
The transition to EMU is combined with benefits and costs:
Benefits:
1. The abolishment of intra-european currency crises as a
consequence of independent national monetary policies under high capital
mobility.
2. A reduction of monetary risks by the pooling of risks and
an increase of the potential for stability within Europe.
3. A reduction of transactions costs and, as a consequence,
an improvement of the resource allocation.
4. The avoidance of unnecessary adjustment burdens in the real
economy.
5. The elimination of beggar-my-neighbour-policies by the
choice of exchange rates.
6. The abolishment of market segmentation due to exchange
rates, an increase in market transparency and a reduction of price
discriminations.
Costs:
1. In the FRG, we cannot choose anymore an inflation rate
independently of the other countries.
2. The exchange rate instrument is lost as an adjustment
mechanism. On one side, this loss is justified by the fact that the need for
exchange rate adjustments will disappear due to the unified monetary policy in
EMU. On the other side, for the real economy only a knife with two cutting
edges gets lost which in addition is not permamently but only transitorily
effective.
EXTERNAL LINKS
1. EMU: A
Historical Documentation (European Commission)
<http://ec.europa.eu/economy_finance/emu_history/index_en.htm>/ http://ec.europa.eu/economy_finance/emu_history/index_en.htm
2. The euro
(European Commission Economic and Financial Affairs)
<http://ec.europa.eu/economy_finance/the_euro/index_en.htm?cs_mid=2946> / http://ec.europa.eu/economy_finance/the_euro/index_en.htm?cs_mid=2946
3. The euro
and other currency unions in history
<http://samvak.tripod.com/nm032.html>/ http://samvak.tripod.com/nm032.html
4. What is
the European Monetary Union? <http://www.uiowa.edu/ifdebook/faq/faq_docs/EMU.shtml>
University of Iowa Center for International Finance and Development / http://www.uiowa.edu/ifdebook/faq/faq_docs/EMU.shtml