European Economic and Monetary Union (EMU)

An intergovernmental organization where combinations of the common market, customs union, and monetary union are seen. 

 

The European Economic Union is an intergovernmental trade agreement or a part of an intergovernmental organization where combinations of the common market, customs union, and monetary union are seen. 

European economic and monetary union

It was established by going through the sixth of seven processes of economic integration. It creates a liberty inflow of people, services, and goods.

It includes 27 members of the European Union following a single monetary policy set up by the European Central Bank(ECB)

In the year 2002, a common currency, the 'Euro,' was introduced in the European Union and was accepted by 19 out of 27 member countries. 

It provides undeniable advantages of fewer transaction costs, easy movement of labor and services across the union, and raising Europe's position at the international level. 

However, the world economy has also been exposed to widespread changes triggered by liberalization and globalization. 

EU flag art

These challenges can be overcome by developing economic integration between member countries with various comparative advantages through cooperation. The European Union takes such necessary measures to ensure their complementary existence.  

The objective of economic cooperation and integration by the union has been progressing for the last 50 years. 

To that extent, the European Union (EU) has been successful in terms of both political and economic aspects. However, there have been some unanticipated failures and challenges, such as the European financial crisis and Brexit. 

The European Economic and Monetary Union(EMU) is a small part of the greater vision of European integration. 

Organizational Structure of the European Economic and Monetary Union

The EMU was established in 1999 with 11 countries-Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Spain, and Portugal.  

As per the monetary policy, the advantages and disadvantages of EMU are based on the degree of integration among members.

european union grey flag

All countries in the European Union, except the United Kingdom and Denmark, agreed to cooperate and adopt the euro as a common medium of exchange.

Various models have been proposed, but the following are the most commonly identified criteria for a successful currency union:

  • Mobility of labor
  •  Degree of openness, including capital mobility as well as price and wage flexibility,

The extent of intra-regional trade is frequently used as a metric.

  • Shock and business cycle similarity
  •  A risk-sharing system is typically implemented through fiscal transfers.

While many economists and financial experts supported the euro as a single currency, a few others were apprehensive about the concept of a single currency. 

They argued that the fiscal and economic conditions of some countries could cause the downfall of the EMU. 

EU flag wave

The performance of the euro was up to standard until the global economic crisis in 2008. Several countries worldwide suffered due to the economic crisis. Eurozone member states with weaker economies suffered in repaying their debts.

History

In June 1988, the European Union realized the progressive nature of the Economic and Monetary Union. 

A committee was formed to study and propose stages for this union, and Jacques Delors, the then president of the European Commission, was appointed as chairperson. 

europe map

Long before the European Communities were founded, the idea of a monetary and economic union in Europe was initially floated.

For instance, the Latin Monetary Union was active between 1865 and 1927. Gustav Stresemann requested a European currency in the League of Nations in 1929] against the backdrop of a growing economic divide brought on by the emergence of several new nation-states in Europe following World War I.

The governor of the De Nederlandsche Bank, Marius Holtrop, argued that a common central-bank policy was required in a united Europe in 1957 at the European Forum Alpbach. 

But the heads of the National Bank of Belgium, Bank of France, and Deutsche Bundesbank disagreed with his later support for a coordinated initiative by the European Community's central banks.

An initiative by the European Commission in 1969 that outlined the need for "greater coordination of economic policies and monetary cooperation" is credited as the first actual attempt to forge an economic and monetary union between the members of the European Communities.

eu flag translucent

This was followed by the Heads of State or Government's decision at their summit meeting in The Hague in 1969 to develop a staged plan with a view to forging an economic and monetary union.

The first widely accepted plan to establish an economic and monetary union in three stages was proposed in October 1970 by an expert committee led by Luxembourg's Prime Minister and Finance Minister, Pierre Werner. This plan was based on a number of earlier suggestions (Werner plan). 

The Bretton Woods System's breakdown in August 1971, when the US dollar could not be converted into gold, and the spike in oil prices in 1972 both had a significant negative impact on the project. Using a snake in the tunnel to control the swings of European currencies didn't work.

Eu flag majestic

The report was known as Delors Report. It stated the discrete steps to be achieved and the revolutionary steps to do so. 

Stage 1

With the Delors Report in consideration, the European Council decided in June 1989 that the initial stage of EMU should begin on 1 July 1990. By that date, in principle, all restrictions on the movement of capital between the Member States were to be removed.

Governors' Committee

The Committee of Governors of the national banks of the member states of the ECU Economic Community, which had assumed an undeniably significant part in monetary collaboration since its creation in May 1964, was given extra liabilities

These were set down during a council decision dated 12 March 1990. Their new undertakings included holding conferences for and advancing the coordination of monetary strategies among the Member States while maintaining cost efficiency. 

Considering the brief time frame accessible and the intricacy of the undertakings in question, the preliminary work for Stage Three of the Economic and Monetary Union (EMU) was likewise started by the Committee of Governors. 

The essential advancement needed was to distinguish every one of the issues that were brought up at the beginning phase and also to decide on a work program toward the end of 1993. 

And also to characterize likewise the commands of the current sub-boards and working gatherings laid out for that reason.

venice

Legal arrangements

To accomplish Stages Two and Three, the Treaty formed by the European Economic Community (the Treaty of Rome) had to reconsider and lay out the expected institutional design. 

To this end, an Intergovernmental Conference of countries involved in EMU was assembled, which was held in 1991 in line with the Intergovernmental Conference on political association. Central Bank and the Protocol on the Statute of the European Monetary Institute didn't come into force until 1 November 1993.

Eu flag on red building

Stage 2

Some of the steps taken in the second stage of the creation of economic and monetary union are listed below,

Foundation of the EMI and the ECB

The foundation of the European Monetary Institute (EMI) on 1 January 1994 denoted the beginning of the second phase of EMU and with this, the Committee of Governors was disbanded. 

The EMI's fleeting presence additionally reflected the condition of financial inclusion inside the Community. 

buildings in europe

Have any capability for completing unfamiliar trade mediation.

The two principal errands of the EMI:

  • to reinforce national bank collaboration and money-related arrangements, and

  • To make the arrangements expected for the foundation of the European System of Central Banks (ESCB), for the lead of a single financial strategy, and the production of solitary cash in the third stage.

In December 1995, the European Council consented to name the European cash unit the 'euro,' which was to be presented towards the beginning of Stage Three, and affirmed that Stage Three of the EMU would begin on 1 January 1999. 

A sequential succession of occasions was pre-reported for the changeover to the euro. This situation was fundamentally founded on detailed recommendations expounded by the EMI.

ERM II

Simultaneously, the EMI was given the errand of completing the preliminary work on future financial and swapping scale connections between the euro region and other EU nations.

In December 1996, the EMI introduced its report to the European Council on the standards and central components of the new swapping scale system (ERM II), which was enforced in June 1997. This shaped the theory of resolution in the EC.

notes

The new banknotes

In December 1996, the EMI introduced new banknotes to the European Council. For the general society, a planned series of euro banknotes was to be brought into effect on 1 January 2002.

Security and Growth Pact

To supplement and determine the treaty arrangements on EMU, the European Council embraced the Stability and Growth Pact in June 1997 to guarantee monetary discipline concerning EMU.

euro notes

The Pact was enhanced, and a Declaration of the Council upgraded the separate responsibilities of the members in May 1998. 

Beginning members

On 2 May 1998, the Council of the European Union concluded that 11 Member States had satisfied the criterion important for support in the third phase of EMU and the acceptance of a single currency on 1 January 1999.

These founding members were Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, and Finland. 

The Heads of State or Government likewise formed a political comprehension on the members of the EU to be suggested for the members to be included in the Board of the European Central Bank (ECB).

The groundwork for fixing the exchange rates

coins

Furthermore, in May 1998, the financial department of the participating Member States agreed, along with the legislative leaders of these Member States' public national banks, the European Commission, and the EMI, that the ongoing ERM reciprocal focal rates of the participating Member States' monetary standards would be used in determining the euro's permanent change rates.

Arrangement of dynamic bodies

On 25 May 1998, the legislatures of the 11 Member States named the President, the Vice-President, and four different individuals to the Executive Board of the ECB. Their arrangement produced results from 1 June 1998 and marked the foundation of the ECB. 

The ECB and the public national banks of the partaking Member States comprise the Eurosystem, which forms and characterizes the single money-related approach in Stage Three of EMU.

UK and EU

With the foundation of the ECB on 1 June 1998, the EMI had finished its job. As per Article 123 (ex Article 109l) of the Maastricht treaty l, the EMI went into liquidation on the foundation of the ECB. 

All the preliminary work shared with the EMI was finished eventually, and the remainder of 1998 was committed to the last testing of frameworks and methodology by the ECB.

Stage 3

Some of the steps taken in the formation of EMU are listed below,

Unalterable fixing of trade rates

On 1 January 1999, the third and last phase of EMU started with the unalterable fixing of the trade rates among the initial 11 Member States of the Monetary Union using a solitary money-related strategy under the obligation of the ECB.

france

The number of partaking Member States expanded to 12 on 1 January 2001, when Greece entered the third phase of EMU. 

Slovenia turned into the thirteenth individual from the euro region on 1 January 2007, followed one year after by Cyprus and Malta, Slovakia on 1 January 2009, Estonia on 1 January 2011, Latvia on 1 January 2014, and Lithuania on 1 January 2015. 

On the day every nation joined the euro region, its national bank turned out to be essential for the Eurosystem.

Monetary Union Benefits 

The benefits of MU are as follows:

  1. A cash association assists individuals with reinforcing their intensity on a worldwide scale, thereby killing the conversion standard gamble.

  2. Exchanges among member states can be handled quickly, and their transaction costs decline since charges to banks are lower.

  3. Costs are more straightforward as they are simpler to analyze, which empowers fair contest.

  4. The likelihood of a money-related emergency is lower. The more nations there are in the cash association, the more they are impervious to an emergency.

cash balance

Monetary Union Weaknesses

The weaknesses associated with MU are:

  1. The party states lose their power in money-related choices. There is normally an organization (like a national bank) that deals with monetary policymaking in the entire cash association.

  2. The gamble of lopsided "shocks" may happen. The models set by the money association are never great, so a gathering of nations may be significantly more terrible off while other individual nations may be booming.

  3. Carrying out transactions using different currencies causes high monetary expenses. Organizations and individual consumers need to adjust to the new currency in their country, which incorporates costs for the organizations to set up their administration and representatives. Additionally, they need to illuminate their clients and cycle bounty regarding new information.

  4. With limitless capital development, moving most assets to more useful areas may be detrimental to less useful areas. The more useful locations will frequently attract additional capital in labor and products, potentially diverting much-needed investment away from the less useful areas.

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Research and authored by Khadeeja C Abbas | LinkedIn

Reviewed and Edited by Manya Bhardwaj | LinkedIn

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