Economic and Monetary Union of the European Union
Encyclopedia
The Economic and Monetary Union (EMU) is an umbrella term
for the group of policies aimed at converging the economies of members of the European Union
in three stages so as to allow them to adopt a single currency, the euro. As such, it is largely synonymous with the eurozone
.
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. Seventeen member states
of the European Union, including, most recently, Estonia, have entered the third stage and have adopted the euro as their currency. Denmark, 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 ten EU members continue to use their own currencies
.
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.
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," 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. 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:
countries constitute an optimum currency area
.
Umbrella term
An umbrella term is a word that provides a superset or grouping of concepts that all fall under a single common category. Umbrella term is also called a hypernym. For example, cryptology is an umbrella term that encompasses cryptography and cryptanalysis, among other fields...
for the group of policies aimed at converging the economies of members of the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
in three stages so as to allow them to adopt a single currency, the euro. As such, it is largely synonymous with the eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
.
All member states of the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
are expected to participate in the EMU. The Copenhagen criteria
Copenhagen criteria
The Copenhagen criteria are the rules that define whether a country is eligible to join the European Union. The criteria require that a state has the institutions to preserve democratic governance and human rights, has a functioning market economy, and accepts the obligations and intent of the EU...
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
European Exchange Rate Mechanism
The European Exchange Rate Mechanism, ERM, was a system introduced by the European Community in March 1979, as part of the European Monetary System , to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of...
("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. Seventeen member states
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
of the European Union, including, most recently, Estonia, have entered the third stage and have adopted the euro as their currency. Denmark, 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 ten EU members continue to use their own currencies
Currencies of the European Union
There are fourteen currencies of the European Union as of 2011, the principal currency being the euro. The euro is used by the institutions of the European Union and by the eurozone states, which account for 17 of the 27 member states of the European Union...
.
History
First ideas of an economic and monetary unionEconomic and monetary union
An economic and monetary union is a type of trade bloc which is composed of an economic union with a monetary union. It is to be distinguished from a mere monetary union , which does not involve a common market. This is the fifth stage of economic integration...
in Europe were raised well before establishing the European Communities
European Communities
The European Communities were three international organisations that were governed by the same set of institutions...
. For example, already in the League of Nations
League of Nations
The League of Nations was an intergovernmental organization founded as a result of the Paris Peace Conference that ended the First World War. It was the first permanent international organization whose principal mission was to maintain world peace...
, Gustav Stresemann
Gustav Stresemann
was a German politician and statesman who served as Chancellor and Foreign Minister during the Weimar Republic. He was co-laureate of the Nobel Peace Prize in 1926.Stresemann's politics defy easy categorization...
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.
A first attempt to create an economic and monetary union between the members of the European Communities
European Communities
The European Communities were three international organisations that were governed by the same set of institutions...
goes back to an initiative by the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
in 1969, which set out the need for "greater co-ordination of economic policies and monetary cooperation," which was followed by the decision of the Heads of State or Government at their summit meeting in The Hague
The Hague
The Hague is the capital city of the province of South Holland in the Netherlands. With a population of 500,000 inhabitants , it is the third largest city of the Netherlands, after Amsterdam and Rotterdam...
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
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
) and from rising oil prices in 1972. An attempt to limit the fluctations of European currencies, using a snake in the tunnel
Snake in the tunnel
The snake in the tunnel was the first attempt at European monetary cooperation in the 1970s, aiming at limiting fluctuations between different European currencies...
, 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
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
, Jacques Delors
Jacques Delors
Jacques Lucien Jean Delors is a French economist and politician, the eighth President of the European Commission and the first person to serve three terms in that office .-French Politics:...
, was asked to propose a new timetable with clear, practical and realistic steps for creating an economic and monetary union. This way of working was derived from the Spaak method
Spaak method
The Spaak-method of negotiating is named after Paul-Henri Spaak, who applied this method at the Intergovernmental Conference on the Common Market and Euratom in 1956 at Val Duchesse castle in preparing for the Treaties of Rome in 1957....
.
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
European System of Central Banks
The European System of Central Banks is composed of the European Central Bank and the national central banks of all 27 European Union Member States.-Functions:...
(ESCB), which would become responsible for formulating and implementing monetary policy.
The three stages for the implementation of the EMU were the following:
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 CommunityEuropean Economic CommunityThe European Economic Community The European Economic Community (EEC) The European Economic Community (EEC) (also known as the Common Market in the English-speaking world, renamed the European Community (EC) in 1993The information in this article primarily covers the EEC's time as an independent...
. - The Treaty of Maastricht in 1992 establishes the completion of the EMU as a formal objective and sets a number of economic convergence criteriaConvergence criteriaThe euro convergence criteria are the criteria for European Union member states to enter the third stage of European Economic and Monetary Union and adopt the euro as their currency...
, 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 InstituteEuropean Monetary InstituteThe European Monetary Institute was the forerunner of the European Central Bank , operating between 1994 and 1997.-History:The EMI was created 1 January 1994 to oversee the second stage in the creation of monetary union. The EMI itself took over from the earlier European Monetary Cooperation Fund...
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 euroEuroThe euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
) as well as the duration of the transition periods are decided. - On 16–17 June 1997, the European CouncilEuropean CouncilThe European Council is an institution of the European Union. It comprises the heads of state or government of the EU member states, along with the President of the European Commission and the President of the European Council, currently Herman Van Rompuy...
decides at Amsterdam to adopt the Stability and Growth PactStability and Growth PactThe Stability and Growth Pact is an agreement among the 27 Member states of the European Union that take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union...
, 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 BankEuropean Central BankThe European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
(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 coinsEuro coinsThere are eight euro coin denominations, ranging from one cent to two euros . The coins first came into use in 2002. They have a common reverse, portraying a map of Europe, but each country in the eurozone has its own design on the obverse, which means that each coin has a variety of different...
, 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.
- On 1 January 2011, Estonia joins the third stage of the EMU.
Criticism
There have been debates as to whether the EurozoneEurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
countries constitute an optimum currency area
Optimum currency area
In economics, an optimum currency area , also known as an optimal currency region , is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. It describes the optimal characteristics for the merger of currencies or the creation of a...
.
External links
- EMU: A Historical Documentation (European Commission)
- The euro (European Commission Economic and Financial Affairs)
- Central Bank Rates: ECB Key Rate, chart and data
- What is the European Monetary Union? University of Iowa Center for International Finance and Development
- Economic and Monetary Union of the European Union European Navigator