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European Union

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A monetary union is an arrangement 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, achieving economic convergence (that is, their economic cycles are broadly in step) 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. The Copenhagen criteria is the current set of conditions of entry for states wanting to join the EU. It contains the requirements that need to be fulfilled and the time framework within which this must be done in order for a country to join the monetary union. An important element of this is the European Exchange Rate Mechanism ("ERM II"), in which candidate currencies demonstrate economic convergence by maintaining limited deviation from their target rate against the euro.

All member states, except Denmark and the United Kingdom, have committed themselves by treaty to join EMU. Sixteen member states of the European Union have entered the third stage and have adopted the euro as their currency. Denmark, Estonia, Latvia, and Lithuania are the current participants in the exchange rate mechanism. Of the pre-2004 members, the United Kingdom and Sweden have not joined ERM II and Denmark remains in ERM without proceeding to the third stage. The five remaining (post-2004) states have yet to achieve sufficient convergence to participate. These eleven EU members continue to use their own currencies.

EMU is sometimes referred to as European Monetary Union, this is not correct.

Contents

History of the 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 (Link) against the background of an increased economic division due to a number of new nation states in Europe after WWI.

A first attempt to create an economic and monetary union between the members of the European Communities goes back to an initiative by the European Commission in 1969, which set out the need for "greater co-ordination of economic policies and monetary cooperation" (Barre Report), which was followed by the decision of the Heads of State or Government at their summit meeting in The Hague in 1969 to draw up a plan by stages with a view to creating an economic and monetary union by the end of the 1970s.

On the basis of various previous proposals, an expert group chaired by Luxembourg’s Prime Minister and Finance Minister, Pierre Werner, presented in October 1970 the first commonly agreed blueprint to create an economic and monetary union in three stages (Werner plan). The project experienced serious setbacks from the crises arising from the non-convertibility of the US dollar into gold in August 1971 (i.e. the collapse of the Bretton Woods System) and from rising oil prices in 1972. An attempt to limit the fluctations of European currencies, using a snake in the tunnel, failed.

The debate on EMU was fully re-launched at the Hanover Summit in June 1988, when an ad hoc committee (Delors Committee) of the central bank governors of the twelve member states, chaired by the President of the European Commission, Jacques Delors, was asked to propose a new timetable with clear, practical and realistic steps for creating an economic and monetary union[1]. This way of working was derived from the Spaak method.

The Delors report of 1989 set out a plan to introduce the EMU in three stages and it included the creation of institutions like the European System of Central Banks (ESCB), which would become responsible for formulating and implementing monetary policy.

The three stages for the implementation of the EMU were the following:

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Stage One: 1 July 1990 to 31 December 1993

  • On 1 July 1990, exchange controls were abolished, thus capital movements were completely liberalised in the European Economic Community.
  • The Treaty of Maastricht in 1992 establishes the completion of the EMU as a formal objective and sets a number of economic convergence criteria, concerning the inflation rate, public finances, interest rates and exchange rate stability.
  • The treaty enters into force on the 1 November 1993.

Stage Two: 1 January 1994 to 31 December 1998

  • The European Monetary Institute is established as the forerunner of the European Central Bank, with the task of strengthening monetary cooperation between the member states and their national banks, as well as supervising ECU banknotes.
  • On 16 December 1995, details such as the name of the new currency (the euro) as well as the duration of the transition periods are decided.
  • On 16-17 June 1997, the European Council decides at Amsterdam to adopt the Stability and Growth Pact, designed to ensure budgetary discipline after creation of the euro, and a new exchange rate mechanism (ERM II) is set up to provide stability above the euro and the national currencies of countries that haven't yet entered the eurozone.
  • On 3 May 1998, at the European Council in Brussels, the 11 initial countries that will participate in the third stage from 1 January 1999 are selected.
  • On 1 June 1998, the European Central Bank (ECB) is created, and in 31 December 1998, the conversion rates between the 11 participating national currencies and the euro are established.

Stage Three: 1 January 1999 and continuing

  • From the start of 1999, the euro is now a real currency, and a single monetary policy is introduced under the authority of the ECB. A three-year transition period begins before the introduction of actual euro notes and coins, but legally the national currencies have already ceased to exist.
  • On 1 January 2001, Greece joins the third stage of the EMU.
  • The euro notes and coins are introduced in January 2002.
  • On 1 January 2007, Slovenia joins the third stage of the EMU.
  • On 1 January 2008, Cyprus and Malta join the third stage of the EMU.
  • On 1 January 2009, Slovakia joins the third stage of the EMU.
For continuing information, see Euro, Eurozone and Enlargement of the Eurozone.

Criticism

There have been debates as to whether the Eurozone countries constitute an optimum currency area.[2]

See also

References

  1. ^ Verdun A., The role of the Delors Committee in the creation of EMU: an epistemic community?, Journal of European Public Policy, Volume 6, Number 2, 1 June 1999 , pp. 308-328(21)
  2. ^ "As Euro Nears 10, Cracks Emerge in Fiscal Union" (New York Times, 1 May 2008)

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