INTRODUCTION
Economic and Monetary Union (EMU) has a prominent place on the European agenda for many years. There is a rapidly growing literature on the pros and cons of EMU.
European and Monetary Union is an important subject in itself but not only for economic reasons. Money has also been frequently seen as an instrument for the achievement of wider political objectives. It may, therefore, be rather unfortunate that markets and economic fundamentals do not always oblige by adjusting themselves to the exigencies of high politics. The history of European monetary integration can be seen, using a slightly old-fashioned terminology, as a dialectical process between wider political objectives and market realities.
The single currency is a necessary step towards the creation of the Single Market within the European Union. Its purpose is to guarantee a stable financial and economic environment in which companies and individuals can operate free of the exchange fluctuations and associated complexities of the past 30 years.
In this course work I will examine briefly the history of European monetary integration, concentrating on the more recent period. I will attempt to throw some light on the way in which three stages of development of Economic and Monetary Union have been gone through. The goal of this course work is to examine benefits and costs of Economic and Monetary Union and the consequences of a single currency.
1. DEVELOPMENT OF ECONOMIC AND MONETARY UNION
The European integration process started after the Second World War and was, at the time, strongly motivated by political factors. The aim was to eliminate the risk that wars and crises would once more plague the continent. The first concrete result was the establishment, in 1952, of the European Coal and Steel Community between six countries (Belgium, France, Germany, Italy, Luxembourg and the Netherlands). This was followed by the adoption of the Treaty of Rome in 1957, laying the foundations for the European Economic Community.
The first concrete proposal for a Monetary Union was presented in the so-called Werner Report in 1970. The Report was intended to pave the way for the establishment of a Monetary Union in the early 1980s. However, the proposals of the Werner Report were never implemented - being overtaken by world events. After the break-up of the Bretton Woods system and the shock of the first oil crisis in 1973, most western European economies were contaminated by the economic sickness popularly labelled "Eurosclerosis", characterised by high inflation and persisting unemployment. At that time, the European economies were protected by regulations and financial markets were still poorly developed. In this environment, it was concluded that a Monetary Union would not be possible and the project was postponed.
The idea of establishing Monetary Union was revived only in 1988 and a detailed proposal was presented the following year in the Delors Report, after the launch (in 1985) of the Single Market programme on the free movement of goods, services, capital and labour. Because of the single market, the Report could be more explicit and credible with regard to how best to achieve closer economic ties between the EU economies before the introduction of a single currency. Moreover, the Report was supported by a detailed description of an institutional set-up geared towards ensuring stability-oriented economic policies.
The European Council came to accept a three-stage for the attainment of EMU:
Stage One was assumed to have been in existence since mid-1990 when its requirements were met:
• Virtually all restrictions on currency and capital movements between Member States had been removed;
• Closer co-ordination of Member States’ economic policies had been achieved;
• Co-operation between central banks had been strengthened;
• Member States were adhering to the Exchange Rate Mechanism.
Stage Two of EMU began on 1 January 1994. Since that date, the Ecofin Council has had new instruments at its disposal to promote convergence :
* each year in the spring, it endorses the broad guidelines of economic policy, which lay down the common objectives in terms of inflation, public finance, exchange rate stability and employment;
* it discusses Member States' economic policies on the basis of national convergence programmes (in which each country adopts a multiannual strategy for meeting the criteria at the earliest possible moment) and the Commission's report on convergence;
* it decides which countries have an excessive deficit; and recommends to each of the countries the measures needed to remedy the situation. If these recommendations are not followed, it may decide to publish them, a step that could have a significant political and market effect.
The year 1994 also saw the creation of the European Monetary Institute. As the forerunner to the European Central Bank, the EMI has to strengthen central bank co-operation and the co-ordination of national monetary policies. It has to make the preparations required for the establishment of the ESCB, for the conduct of a single monetary policy and the creation of a single currency in the third stage of EMU, including the preparation of banknotes. In all these areas, significant progress has already been achieved.
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