European Monetary Union: Theory, History and Consequences

%20is%20a%20situation%20where%20several%20countries%20have%20agreed%20to%20share%20a%20single%20currency%20amongst%20themselves.%20The%20European%20Economic%20and%20Monetary%20Union%20(EMU)%20consists%20of%20three%20stages%20coordinating%20economic%20policy%20and%20culminating%20with%20the%20adoption%20of%20the%20euro%20<http://en.wikipedia.org/wiki/Euro>,%20the%20EU's%20single%20currency.%20All%20member%20states%20of%20the%20European%20Union%20<http://en.wikipedia.org/wiki/European_Union>%20are%20expected%20to%20participate%20in%20the%20EMU.%20Sixteen%20member%20states%20<http://en.wikipedia.org/wiki/Eurozone>%20of%20the%20European%20Union%20have%20entered%20the%20third%20stage%20and%20have%20adopted%20the%20euro%20as%20their%20currency.%20The%20United%20Kingdom%20<http://en.wikipedia.org/wiki/United_Kingdom>,%20Denmark%20<http://en.wikipedia.org/wiki/Denmark>%20and%20Sweden%20<http://en.wikipedia.org/wiki/Sweden>%20have%20not%20accepted%20the%20third%20stage%20and%20the%20three%20EU%20members%20still%20use%20their%20own%20currency%20today.>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. The

European Monetary Union: Theory, History and Consequences

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t). 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.

SUMMARY

 

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./%20http://ec.europa.eu/economy_finance/emu_history/index_en.htm">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. / http://ec.europa.eu/economy_finance/the_euro/index_en.htm?cs_mid=2946">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./%20http://samvak.tripod.com/nm032.html">The euro and other currency unions in history <http://samvak.tripod.com/nm032.html>/ http://samvak.tripod.com/nm032.html

4. University of Iowa Center for International Finance and Development / http://www.uiowa.edu/ifdebook/faq/faq_docs/EMU.shtml">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

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