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 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?

 

A monetary union is a situation where several countries have agreed to share a single currency amongst themselves. The European Economic and Monetary Union (EMU) consists of three stages coordinating economic policy and culminating with the adoption of the euro, the EU's single currency. All member states of the European Union are expected to participate in the EMU. Sixteen member states of the European Union have entered the third stage and have adopted the euro as their currency. The United Kingdom, Denmark and Sweden have not accepted the third stage and the three EU members still use their own currency today.

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 in Europe were raised well before establishing the European Communities. For example, already in the League of Nations, 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.

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. ............