Economic and Monetary Union in Europe - Assignment Example

Economic and monetary union in Europe Introduction The concept of an international monitory system has evolved during the initial half of twentieth century as a result of the 1930 financial crisis and the financial problems faced by the global countries due to two world wars. “The general idea of the existence of a monitory system is that it provides means of payment appropriate between buyers and sellers of different nationality. This system also guarantees deferred payment” (Evolution of International Monetary System support Mechanisms, n. d, p.1). In the 1940’s America and Britain tried to introduce an international monitory system under the label of Bretton Woods. Bretton Woods system failed to prosper because of many reasons. However, during the latter part of the twentieth century, European countries succeeded in integrating the European world under the common umbrella of European Union (EU). When the concept of European Union was initially proposed, people thought it as a simple regional cooperation to exploit the possibilities of globalization. The concept of Economic and Monitory Union (EMU) in Europe was discussed earlier, but it failed to materialize because of various reasons. “The immediate impulse that led to the relaunch of EMU in the late 1980s was in the prospect of the completion of the Single Market” (INTERNATIONAL MONETARY ECONOMICS: lecture 10, p.2). “On December 10, 1991, at the Maastricht summit, the member states of the European Communities adopted the treaty on European Union. It amends and extends the 1957 treaty of Rome which established the European Economic Community” (Kenen, 1995, p.1). This paper analyses the economic and monitory unions in Europe. Economic and monetary union in Europe The economic and monitory union (EMU) in Europe was established in 1999. The EMU has two components; an exchange rate union, and complete convertibility. Moreover, there are a number of alternative sets of monetary arrangements that are in theory consistent with monetary union such as currency union, exchange rate union, free inter-circulation union, parallel currency union etc. The necessities of a single currency in the integration process forced EU to think in terms of a single currency under the control of EU rather than the individual member countries. EU is responsible for determining the exchange rates, interest rate and other monitory polices. Individual countries do not have the authority to print more currencies or Euros than prescribed by the EU. The exchange rate union concept was introduced in order to ensure the flow of free capital across the entire region of Europe. The free inter-circulation union ensures the free movement of EU member country currencies across the entire European region whereas parallel currency union helped EU to fix prices to all goods services and commodities based on individual currencies (INTERNATIONAL MONETARY ECONOMICS: lecture 9, p.2-3) The EU member countries never expected the chances of creation of a common currency like Euro since such a concept was not practiced in the history yet. American dollar, the strongest currency during the later part of the twentieth century, started to show signs of deterioration along with British Pound which motivated the EU economic experts to think in terms of a common European currency like Euro. The introduction of Euro strengthened the integration process further and gave momentum to the economic progress of European region. The Treaty of Maastricht decided to introduce a single currency, in three stages in Europe. The first stage (1 July 1990 to December 31, 1993) concentrated on the liberalization of capital movements. The second stage, (1 January 1994 to 31 December 1998), concentrated on the implementation of legislations, euro bank notes and coins. The third and final stage (1 January 1999 onwards) marked the effective functioning of Euro and the economic and monetary union of the Europe and the individual currencies were completely ceased (The Start of EMU and the Euro, n. d). The introduction of common currency, Euro helped EU in many ways during the recent financial crisis period. “For example, as the ECB was able to reduce interest rates for the entire euro area (instead of each country setting its own exchange rate), banks throughout the EU now have the same conditions for borrowing from, and lending money to, each other” (Economic and Monetary Affairs, 2011) The establishment of EMU helped EU in many ways. Consumption will occur in single currency irrespective of which participating country the individual happens to be visiting, stimulation of tourism, enlarging the opportunities of financial integration, impacting upon the democratic process etc” (Baimbridge & Whyman, 2003, p.1) are some of the major advantages of establishment of EMU. Many of the European countries were earlier under communist regime. Even though, communism exhausted in the Eastern European countries, still the communist leaders were looking for opportunities to regain power. The establishment of EMU has put boiled water upon such ambitions and the democratization process strengthened in Europe. Many people are of the view that “The primary aim of the establishment of EMU is to contribute to the creation of political union to avoid conflicts between west European nations” (Denton, 1974, p.1). The above view is partly right as the conflicts between the EU member countries reduced considerably after the establishment of EMU and the integration process. However, the major aim of EMU is not political gains, but economical gains. Political gains come only as a supplementary gain. The actual intention behind the establishment of EMU is economic stability in the entire European region rather than the political stability. It should be noted that the European region is developing more rapidly now after the establishment of EMU. Costs and benefits of EMU Fixed exchange rate is one of the major benefits of EMU. Fixed exchange rates reduce the chances of currency fluctuation and the EU member countries can more effectively participate in international trade activities. Euro established prominence over Dollar and Yen which helped the EU countries to borrow goods from foreign countries at a comparatively lower interest rate. Moreover the opportunity cost of the holdings reduced considerably for EU countries as a result of the establishment of EMU. Goods movement across the entire European region became easier and the individuals and businesses in European countries enjoyed the luxury of increased saving because of EMU. Euro or the single currency reduced the administrative costs very much inflation rates come down across the entire European region. In short, the establishment of EMU resulted in regional stabilization and increased competitive power for the European countries. (INTERNATIONAL MONETARY ECONOMICS Lecture 10 p.6) The loss of national economic policies, autonomy and sovereignty are the major costs, member countries sacrificed for the establishment of EMU. The needs of a particular nation often overlooked while considering the needs of the entire European region after the establishment of EMU. The policies required to balance the internal and external were absent for the member countries after the EMU was formed. Adjustments required to accommodate the necessities of the successful operation of single currency, affected small firms drastically. The establishment of ECB forced member countries to transfer the majority of their foreign reserves under the control of ECB. Weaker EU regions continue to suffer from unemployment and economic decline even after the establishment of EMU. In short, economic sovereignty became a myth for the EU member countries after the introduction of EMU(INTERNATIONAL MONETARY ECONOMICS Lecture 10, p.7) Conclusions The 1999 creation of economic and monitory union (EMU) in Europe has made significant changes in the political and economical circles in Europe. The integration process of European countries became more meaningful with the establishment of EMU and the introduction of single currency Euro. Political conflicts and economic disputes between the EU member countries reduced a lot as a result of the introduction of Euro and establishment of EMU. Politically, EMU helped Europe in the democratization process and economically, it helped Europe to progress more rapidly and to counter the problems caused by the recent recession. References 1. Baimbridge, M & Whyman P. (2003) Economic and monetary union in Europe: theory, evidence and practice Edward Elgar Publishing, 2003 2. Denton G.R. (1974) Economic and monetary union in Europe. Routledge, 1974 3. Evolution of International Monetary System support Mechanisms, (n. d). 4. Economic and Monetary Affairs (2011). [Online] Available at: http://europa.eu/pol/emu/index_en.htm [Accessed on 30 April 2011] 5. INTERNATIONAL MONETARY ECONOMICS (n. d). Lecture 9 - Economic and Monetary Union in Europe (1) 6. INTERNATIONAL MONETARY ECONOMICS (n. d). Lecture 10 - Economic and Monetary Union in Europe (2) 7. Kenen P.B. (1995). Economic and monetary union in Europe. Cambridge University Press. 8. The Start of EMU and the Euro, (n. d.). [Online] Available at: http://ec.europa.eu/economy_finance/emu_history/history/part_a_2_d.htm [Accessed on 30 April 2011] Read More