The economic and monetary union (EMU) of the European Union is a group of policies aimed at converging the economies of member states of the European Union at three stages.
There are three stages of the EMU, each of which consists of progressively closer economic integration. Only once a state participates in the third stage it is permitted to adopt the euro as its official currency. As such, the third stage is largely synonymous with the eurozone. The euro convergence criteria are the set of requirements that needs to be fulfilled in order for a country to be approved to participate in the third stage. An important element of this is participation for a minimum of two years in the European Exchange Rate Mechanism ("ERM II"), in which candidate currencies demonstrate economic convergence by maintaining limited deviation from their target rate against the euro.
The EMU policies cover all European Union member states. All new EU member states must commit to participate in the third stage in their treaties of accession and are obliged to enter the third stage once they comply with all convergence criteria. Twenty-one EU member states, including most recently Bulgaria, have entered the third stage and have adopted the euro as their currency. Denmark, whose EU membership predates the introduction of the euro, has a legal opt-out from the EU Treaties and is thus not required to enter the third stage.
History
Early developments The idea of an economic and monetary union in Europe was first raised well before establishing the European Communities. For example, the Latin Monetary Union existed from 1865 to 1927. In the League of Nations, Gustav Stresemann asked in 1929 for a European currencyLink against the background of an increased economic division due to a number of new nation states in Europe after World War I.
In 1957 at the European Forum Alpbach, De Nederlandsche Bank Governor Marius Holtrop argued that a common central-bank policy was necessary in a unified Europe, but his subsequent advocacy of a coordinated initiative by the European Community's central banks was met with skepticism from the heads of the National Bank of Belgium, Bank of France and Deutsche Bundesbank.
A first concrete attempt to create an economic and monetary union between the members of the European Communities goes back to an initiative by the European Commission in 1969, which set out the need for "greater co-ordination of economic policies and monetary cooperation,"Barre Report which was followed by the decision of the Heads of State or Government at their summit meeting in The Hague in 1969 to draw up a plan by stages with a view to creating an economic and monetary union by the end of the 1970s.
On the basis of various previous proposals, an expert group chaired by Luxembourg's Prime Minister and Finance Minister, Pierre Werner, presented in October 1970 the first commonly agreed blueprint to create an economic and monetary union in three stages (Werner plan). The project experienced serious setbacks from the crises arising from the non-convertibility of the US dollar into gold in August 1971 (i.e., the collapse of the Bretton Woods System) and from rising oil prices in 1972. An attempt to limit the fluctuations of European currencies, using a snake in the tunnel, failed.
Delors Report
The debate on EMU was fully re-launched at the Hannover Summit in June 1988, when the ad hoc Delors Committee of the central bank governors of the twelve member states, chaired by the President of the European Commission, Jacques Delors, was asked to propose a new timetable with clear, practical and realistic steps for creating an economic and monetary union.Verdun A., The role of the Delors Committee in the creation of EMU: an epistemic community?, Journal of European Public Policy, Volume 6, Number 2, 1 June 1999, pp. 308–328(21) This way of working was derived from the Spaak method.
The Delors report of 1989 set out a plan to introduce the EMU in three stages and it included the creation of institutions like the European System of Central Banks (ESCB), which would become responsible for formulating and implementing monetary policy.Delors Report
The three stages for the implementation of the EMU were the following:
Stage One: 1 July 1990 to 31 December 1993 On 1 July 1990, exchange controls are abolished, thus capital movements are completely liberalised in the European Economic Community. The Treaty of Maastricht in 1992 establishes the completion of the EMU as a formal objective and sets a number of economic convergence criteria, concerning the inflation rate, public finances, interest rates and exchange rate stability. The treaty enters into force on 1 November 1993.
Stage Two: 1 January 1994 to 31 December 1998 The European Monetary Institute is established as the forerunner of the European Central Bank, with the task of strengthening monetary cooperation between the member states and their national banks, as well as supervising ECU banknotes. On 16 December 1995, details such as the name of the new currency (the euro) as well as the duration of the transition periods are decided. On 16–17 June 1997, the European Council decides at Amsterdam to adopt the Stability and Growth Pact, designed to ensure budgetary discipline after creation of the euro, and a new exchange rate mechanism (ERM II) is set up to provide stability above the euro and the national currencies of countries that haven't yet entered the eurozone. On 3 May 1998, at the European Council in Brussels, the 11 initial countries that will participate in the third stage from 1 January 1999 are selected. On 1 June 1998, the European Central Bank (ECB) is created, and on 31 December 1998, the conversion rates between the 11 participating national currencies and the euro are established.
Stage Three: 1 January 1999 and continuing From the start of 1999, the euro is now a real currency, and a single monetary policy is introduced under the authority of the ECB. A three-year transition period begins before the introduction of actual euro notes and coins, but legally the national currencies have already ceased to exist. On 1 January 2001, Greece joins the third stage of the EMU. On 1 January 2002, the euro notes and coins are introduced. On 1 January 2007, Slovenia joins the third stage of the EMU. On 1 January 2008, Cyprus and Malta join the third stage of the EMU. On 1 January 2009, Slovakia joins the third stage of the EMU. On 1 January 2011, Estonia joins the third stage of the EMU. On 1 January 2014, Latvia joins the third stage of the EMU. On 1 January 2015, Lithuania joins the third stage of the EMU. On 1 January 2023, Croatia joins the third stage of the EMU. On 1 January 2026, Bulgaria joins the third stage of the EMU.
Criticism There have been debates as to whether the eurozone countries constitute an optimum currency area."As Euro Nears 10, Cracks Emerge in Fiscal Union" (The New York Times, 1 May 2008)
There has also been significant doubt if all eurozone states really fulfilled a "high degree of sustainable convergence" as demanded by the Maastricht treaty as condition to join the Euro without getting into financial trouble later on.
Monetary policy inflexibility
Since membership of the eurozone establishes a single monetary policy and essentially use of a 'foreign currency' for the respective states, they can no longer use an isolated national monetary policy as an economic tool within their central banks. Nor can they issue money to finance any required government deficits or pay interest on government bond sales. All this is effected centrally from the ECB. As a consequence, if member states do not manage their economy in a way that they can show a fiscal discipline (as they were obliged by the Maastricht treaty), the mechanism means a member state could effectively 'run out of money' to finance spending. This is characterized as a sovereign debt crisis where a country is without the possibility of refinancing itself with a sovereign currency. This is what happened to Greece, Ireland, Portugal, Cyprus, and Spain.
Plans for reformed Economic and Monetary Union Being of the opinion that the pure austerity course was not able to solve the Euro-crisis, French President François Hollande reopened the debate about a reform of the architecture of the eurozone. The intensification of work on plans to complete the existing EMU in order to correct its economic errors and social upheavals soon introduced the keyword "genuine" EMU.Hacker, Björn (2013): On the Way to a Fiscal or a Stability Union? The Plans for a »Genuine« Economic and Monetary Union, FES, online at: http://library.fes.de/pdf-files/id/ipa/10400.pdf At the beginning of 2012, a proposed correction of the defective Maastricht currency architecture comprising: introduction of a fiscal capacity of the EU, common debt management and a completely integrated banking union, appeared unlikely to happen.Busch, Klaus (April 2012): Is the Euro Failing? Structural Problems and Policy Failures Bringing Europe to the Brink, FES, online at: http://library.fes.de/pdf-files/id/ipa/09034.pdf Additionally, there were widespread fears that a process of strengthening the Union's power to intervene in eurozone member states and to impose flexible labour markets and flexible wages, might constitute a serious threat to Social Europe.Janssen, Ronald (2013): A Social Dimension for a Genuine Economic Union, SEJ, online at: http://www.social-europe.eu/2013/03/a-social-dimension-for-a-genuine-economic-union/ In the negotiation process, member states advocated different solutions depending on their social and political characteristics, while the result was a broad compromise.
First EMU reform plan (2012–2015) In December 2012, at the height of the European sovereign debt crisis, which revealed a number of weaknesses in the architecture of the EMU, a report entitled "Towards a genuine Economic and Monetary Union" was issued by the four presidents of the Council, European Commission, ECB and Eurogroup. The report outlined the following roadmap for implementing actions being required to ensure the stability and integrity of the EMU: