European Monetary Union - Assignment Example

In a sense, inefficient exchange of goods, because of price stability is hence discouraged and efficient economic transactions are thus promoted. With all the obvious constancy in prices, it's not all peaches and roses for an optimum currency area. One drawback is that member nation doesn't have the prerogative to pursue its own independent growth and stabilization policies when faced with economic mishaps that might require particular policy measures. Expansionary fiscal and monetary policies can address uptight circumstances of one nation in its desperate call, but another nation may require what is otherwise.

Participating economies do not at all face similar problems more so granted with the same solutions at the same time. In a way, interregional and international differences are issues still too difficult to mitigate since business cycles that reflect upon the economy are diverse. By default, Europe with all the technicalities displays behavior apart from the optimal currency area criteria it requires since Euroland falls short of procedural adjustments that can offset exchange rate fluctuations given differential economic situations (Gobetti 1999).

Essentially, this partial overview of the system of integration is the "glorified straitjacket" the European Union tried to squeeze into. It was in 1979 that the European Monetary System was announced with an aim for a superior monetary integration among its members. A single currency creation was then the extreme task to accomplish to which the European Currency Unit was a sound backdrop for its initial stage. Several rudimentary conditions and features were formulated by the EMS in order to exercise a better operation and execution of its activities without striking out of the borders of its general framework.

In 1989, there was a call for convergence of economic performance. In its transition to a monetary union, the Maastricht Treaty provided conditions to be met if any nation wished to become a member. Budget deficits not over 3% of GDP; government debts not exceeding 60% of GDP and numerous issues on exchange rates gave birth to the SGP or stability and growth pact under which participating countries would operate. This was restructured in a stricter means in the belief that with respect to a smaller than 3% budget deficit member countries to keep hold, it will be feasible to conduct expansionary fiscal policy during times of recessions (Salvatore 2001).

Monetary policies are then out of the question since its initiative is foregone in monetary unions. Penalties will be imposed to nations that will violate the fiscal indicator. The Maastricht Treaty thus paved the way to a true monetary union and the ultimate goal of a single currency was met. The European Monetary Union was established and the euro was born. The adoption of the euro facilitated a more rapid economic and financial integration of member nations as it eliminated the hassles of converting local currencies to foreign denominations and even reduced cost of borrowing in international financial markets.

Cross border transactions were