Economic and Monetary Union

Economic and Monetary Union in Europe

The EU Economic and Monetary Union (EMU)

Introduction to Economic and Monetary Union

Economic and Monetary Union (EMU) is a step beyond a single market toward further integration. EMU requires an intense degree of economic coordination among its members. Participating nations must integrate their budgetary policies, establish common interest rates, and use a single currency. It is a logical step forward from the European Community’s customs union of 1968 and the decision in the 1987 Single European Act to move to a single market.

EMU first appeared on the EC agenda in the late 1960s, following the community’s economic success. At that time, concerns were growing that the post-World War II fixed exchange rate system was beginning to crumble. This system linked the major world currencies to the U.S. dollar, which was tied to the price of gold. However, in the mid-1960s the dollar began to weaken, and confidence in the system waned. What the EC wanted was a fixed exchange rate system that was less susceptible to the influence of the dollar. In 1969 EC leaders asked Pierre Werner, the premier of Luxembourg, to head a committee to devise a new system for the EC. In 1970 they accepted Werner’s recommendation for a movement to full EMU by 1980.

Poor economic conditions in the 1970s, however, forced postponement of the Werner Plan. In 1971 the United States uncoupled the U.S. dollar from gold, and subsequently, currencies that had been tied to the dollar became floating currencies with no fixed exchange rates. Then in 1973 oil prices quadrupled, producing a tumultuous economic climate in which governments were faced with both rising inflation and rising unemployment. EMU was more or less forgotten as the EC instead concentrated on trying to achieve a more modest structure of currency stability. After some initial difficulties, the result was the successful European Monetary System of 1979.

The seemingly positive effects of the EMS and the 1987 decision to form a single market led to a resurrection of the Werner Plan, with EMU to be implemented in three stages after 1990. In Madrid in June 1989 the European Council set up an intergovernmental conference (IGC) to flesh out the proposal. The IGC report was incorporated into the Maastricht Treaty in 1991. It was accepted that the first stage of EMU, the elimination of exchange controls and restrictions on the flow of capital, had already begun. The second stage was set for 1994, when member states would begin to coordinate their economies to reduce inflation and budget deficits. Full EMU, with the inauguration of a single currency under the direction of an EU central bank, would begin in 1999 at the latest. After pressure from Germany, which wanted the single currency to be as strong as the deutsche mark, the EU decided that countries entering the third stage would have to meet strict economic criteria on the size of government deficit, interest rate levels, inflation, and currency stability.

However, the currency speculation problems in 1992 and 1993 that caused Italy and the United Kingdom to leave the ERM, along with a general slide into economic recession, raised doubts about how many countries would meet the EMU criteria. Many governments struggled to control inflation and budget deficits through cuts in government spending and other austerity measures, but their efforts often led to higher unemployment and popular discontent. By 1998 many people within the EU believed that the qualification criteria would have to be relaxed for EMU to occur. Despite these worries, only Greece failed to meet the criteria. On January 1, 1999, the single currency, the euro, went into use. Greece was permitted to adopt the euro two years later, on January 1, 2001, after the Greek government succeeded in lowering inflation and budget deficits.

The economic success of EMU depends on whether the euro is accepted in the international markets as a stable and strong currency and the extent to which it leads to a greater convergence of national economies and greater mobility of production, goods, and services within the EU. There is still debate over whether EMU has a sufficiently firm foundation for these goals to be achieved. However, many EMU supporters find disagreements about the economic costs and benefits less important than the conviction that EMU, even if economically flawed, is an important step toward political integration.

EMU therefore supports the views of Robert Schuman and Jean Monnet that political union is best achieved through economic union. It has also reinforced the central role of France and Germany in the EU. The reunification of Germany reawakened French concerns of German dominance in Europe and energized France’s desire to influence German economic policy. At the same time, Germany wanted to allay fears of an ascendant militaristic German nationalism. Much the same as in 1950, when the European Coal and Steel Community was created, both governments believed that these political issues could be resolved through economic integration. These concerns underpinned a more widespread belief that long-term economic and political benefits outweighed the initial costs of switching to a single currency.” (1)

Economic and Monetary Union and the European Union


See Also

  • EMU


Notes and References

  • Information about Economic and Monetary Union in the Encarta Online Encyclopedia
  • Guide to Economic and Monetary Union

    More Topics about the European Union

    European Economic Area, European Union, European Union History (including European Union Early Cooperation, Benelux Customs Union, European Coal and Steel Community, European Economic Community, European Community, Expansion of the EC, Single European Act, Creation of the European Union, Treaty on European Union, Amsterdam Treaty, Treaty of Nice, Treaty of Lisbon, Monetary Union and EU Growing Accountability), EU Pillar System, EU Major Bodies Structure, European Commission, Council of the European Union, European Parliament, European Court of Justice, Court of Auditors, European Central Bank, Economic and Social Committee, Committee of the Regions, European Union Policies, Common Agricultural Policy, Common Fisheries Policy,

    EU Economic Differences, European Regional Development Fund, European Social Fund, Cohesion Fund, European Investment Bank, European Monetary System, Economic and Monetary Union, EU International Relations, EU Expansion,

    EU and Non-European Nations and European Union Future.

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