EUROPEAN MONETARY UNION (EMU) AND THE SINGLE CURRENCY: ITS CURRENT STATUS

Journal of International Business Research, 2007 by Cooper, Linda W, Tomic, Aleksandar

ABSTRACT

Under the Maastricht Treaty of 1992, a single currency called the "euro" was adopted, and economic criteria for membership in the European Monetary Union were established. The objectives of the Maastricht Treaty were to eliminate the costs connected with several European currencies, increase both currency and international stability, and stimulate economic growth and employment with a more efficient single market and European integration. The individual Member States and the European Union as a whole would benefit with free circulation of goods, services, people, and capital among the Member States ("What is," n.d., p. 2-3).

On January 1, 1999, eleven of the fifteen existing European Union (EU) Member States joined the EMU: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain. In 2000 Greece joined. On January 1, 2002, the EMU began using the euro as its only currency.

This paper will provide a brief history of the European Monetary Union (EMU), motives for its creation, the expected effects that the single currency would have on the EMU economies, and its current status-both the benefits the EMU has enjoyed and the challenges it continues to face.

INTRODUCTION

In 2002 the euro was formally adopted as the only acceptable currency in twelve participating European Union (EU) Member States. The individual Member States known as the European Monetary Union (EMU) and the EU as a whole would benefit with free circulation of goods, services, people, and capital among the Member States. The expectations were high: Costs connected with several European currencies would be eliminated; currency and international stability would be increased with a more efficient single market; and European integration, economic growth, and employment would be stimulated.

It has been four years since the formal introduction of the single currency. Have these expectations been realized?

HISTORY OF THE EMU & EXPECTED OUTCOMES

The groundwork for a single European economy was laid in 1957 when the Treaty of Rome established the European Economic Community. Under the treaty, six European nations agreed to eliminate customs duties and certain restrictions on the import and export of goods among Member States and adopt a common commercial policy.

Over the next thirty years, additional efforts were made to achieve economic unity in Europe, but it was not until June 1988 that the European Council (made up of the 15 European Union Heads of State or Government) submitted the Delors Report. This report defined new monetary union objectives, became the foundation for the Maastricht Treaty that the European Council signed and ratified in 1992, and established the European Central Bank.

Because inflation makes economies less competitive, undermines public confidence, and reduces purchasing power, the European Central Bank (ECB) was established to ensure the stability of the single currency. The ECB would be located in Frankfurt, Germany, would be politically independent, and would assume responsibility for the stability of the common currency for the EU as a whole.

Under the Maastricht Treaty, the European Economic Council officially became the European Union (EU) comprised of 15 Member States: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Greece, Denmark, Sweden, and the United Kingdom. Also under the Treaty a single currency, the euro, was adopted; and economic standards for membership in the European Monetary Union (EMU) were established. To become members of the EMU, EU Member States were required to practice economic and financial discipline by meeting specific convergence criteria:

Inflation rate must be within 1.5 percentage points of the average rate of the three states with the lowest inflation.

The long-term interest rate must be within 2 percentage points of the average rate of the three states with the lowest interest rates.

The national debt must be either already below 60% of GDP or heading for this level.

The national currency must not have been devalued for two years.

Five years after the signing of the Maastricht Treaty, the European Council adopted the "Stability and Growth Pact" which committed the EMU countries to maintaining their budgetary discipline. In fact, fines would be imposed on countries that did not continue meeting the convergence criteria after becoming EMU members (Europa, 2006, para. 2-3).

On January 1, 1999, the euro was launched as an electronic currency and accounting unit among eleven of the fifteen existing EU Member States: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain. Three EU Member StatesDenmark, Sweden, and the United Kingdom-elected not to participate at that time; the remaining member state Greece met the criteria to join the EMU in 2000.

Euro notes and coins entered circulation on January 1, 2002, and during the three-year transitional period (1999-2001) the former national currencies (referred to as "legacy" currencies) continued to circulate. Although during the three-year transition period, economic enterprises were able to use the euro, they were not required to do so until January 1,2002; transactions in national denominations ceased July 2002.