Economic and Monetary Union of the European Union

This article covers the EMU of the European Union. For general information on the topic of economic and monetary unions see economic and monetary union.

In economics, a monetary union is a situation where several countries have agreed to share a single currency among them. 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 participate in the EMU. Twelve member states of the European Union have entered the third stage and have adopted the euro as their currency. The United Kingdom and Denmark have opt-outs exempting them from the transition to the third stage of the EMU. The remaining eleven member states are required to enter the third stage and adopt the euro.

Under the Copenhagen criteria, it is a condition of entry for states acceding to the EU that they be able to fulfil the requirements for monetary union within a given period of time. The 10 new countries that acceded to the European Union in 2004 all intend to join third stage of the EMU in the next ten years, though the precise timing depends on various economic factors. Similarly, those countries who are currently negotiating for entry will also take the euro as their currency in the years following their accession. (See Enlargement of the European Union.)

Prior to adopting the euro, a member state has to have its currency in the European Exchange Rate Mechanism (ERM II) for two years. Cyprus, Denmark, Estonia, Latvia, Lithuania, Malta, Slovenia and Slovakia are the current participants in the exchange rate mechanism.

EMU is sometimes misinterpreted to mean European Monetary Union.

History of the EMU

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:

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 EEC.
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 between the euro and the national currencies of countries that won't yet have 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 finally introduced in January 2002.

Criticism

There are doubts as to whether the Euro-zone countries constitute an optimum currency area. By contrast with the United States, the people of Europe do not share a common language, religion or culture and Europe's history of war between neighbouring states illustrates historical and cultural divisions.

To enable true free movement of goods and free movement of capital, significant harmonisation and opening-up of economies would be necessary, but these aims are proving difficult to implement in the real world. In a democratic system, economic reforms of such audacious scope cannot be imposed upon unwilling populations.

As an example, the budget deficit problems in Italy and Germany are now a continent-wide issue, because Euro-zone interest rates have to be set not just for low-growth Italy and Germany, but also high-growth Ireland.

External links

The euro and other currency unions in history
What is the European Monetary Union? University of Iowa Center for International Finance and Development

Eurozone fiscal matters | Monetary unions

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