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The Economic and Monetary Union of the European Union

August, 1997

With the Treaty for the European Union (EU), the leaders of European Economic Community (EEC) made the historical decision to, before the end of this decade, establish the ECU as the single European currency. A unique European currency that substitute s the 15 national currencies and completes the economic and monetary union (EMU). This Union offers great advantages to the citizens and strengthens the Community's position internationally. By 1999, the final stage of EMU should begin.

What is the EMU

In the EMU all country members' currencies are related among each other always with the same exchange rates. There are no more raises or drops of the currency prices. The citizens and the companies can thanks to this security make a lot more of the ad vantages that the big inside market has to offer. In a monetary union, each country member's currency must be interchangeable without any state restrictions at any time (transferability). Banks and insurances can in this case act without restrictions in a ny country member (complete economic and monetary markets). An economic union has a borderless internal market, that began in the early 1993. A strong competition policy must ensure competition among companies. The economic policies of the member states m ust be coordinated even more intensely than before in an EMU, because when these economic policies develop differently, especially as far as inflation and national debt goes, the exchange rates' balance will be once again threatened. In order to facilitat e the adaptation of the economies of the economically weaker country members, and in particular of those at the borders of the Community, financial support from the more prosperous members is necessary (economic and social coherence).

Uses of the EMU

In the EMU, the fixed determination of the exchange rates entails the reduction of exchange costs. As the Commission determined in one of its researches, the prospects for economic growth and hence for employment and prosperity are getting better. Pri ces remain more stable. Areas that are economically weaker have better opportunities when they can combine their own efforts for growth with those of the Community. The EMU also offers advantages in the state economy sector, since interests are low when i nflation is low and exchange rates are stable. When the ECU becomes an important international currency, as it is with the US dollar or the Japanese yen, banks and other corporations will be able to conduct a great deal of their international business wit h the European currency. This entails cuts in exchange costs and insurance of exchange rates. Other than that, foreign currencies can be stored in central banks.

Progress so far

The European Community has already taken important steps towards the EMU. Since the Hague summit in 1969, the EMU constitutes an official aim of the Community. In 1971 a first attempt was made through the Werner plan to gradually establish the EMU. Af ter the mid-70s' disruptions, the idea of the European Monetary System (EMS) matured with the European monetary unit ECU. The EMS was set in effect in 1979. In the EMS exchange rates for member states' currencies should differ minimally (2.25%). That is a lready a first step towards the final fixing of exchange rates at the final stage of the EMU. In June of 1988 another step towards the EMU was taken by the leaders of the member states, who decided to form a committee of specialists under the presidency o f the president of the European Commission Jacques Delor, who were to examine the means and the ways for the gradual achievement of the EMU. The reason for this decision was the fact that a year ago the reevaluation of the European Community had begun, th e aim of which was the completion of the borderless internal market by 1993 (Common European Act). In April of 1989 the committee concluded its work with the presentation of a report (Delor report), that was the foundation for the course ahead. The Europe an Council of the member states' leaders set July 1st, 1990 to be the beginning date for the first stage of the EMU. Indeed, the deal was held and, with a few exceptions, all regulations in the transferring of currency within the Community were removed. A nd the Maastricht treaty proved how important and imperative the coordination the members' economic policies is to the monetary union.

The second stage for the EMU began January 1st 1994 and that too is a transition period, in the course of which the efforts for convocation will continue and will intensify. The European Monetary Institute (EMI) will begin to operate and its mission w ill be to strengthen the cooperation of the monetary policies, promote the role of the ECU and prepare the establishment of the European Central Bank for the third stage.

The third stage will begin by 1.1.1999. Indeed, in 1998 the ministers of Economy will determine, based on a report from the Commission and the EMI, which member states fulfil the criteria that will allow them to adopt the common currency. In the case where they are at least seven, the European Council will decide, with special majority, on the transition of these countries to the third stage. If that decision is not made, this transition will be made in 1999 again for the countries that fulfil the cri teria, independent of how many these are.

The requirements for the transition on to the third stage were determined to be as follows: Price Stability (percentage of inflation cannot exceed 1.5% of the average percentage of the three members that have the lowest inflation) , interest rates (long term interest rates cannot vary more than 2% with respect to the average of the three countries that have the lowest interest rates), deficits (national state deficits must be below 3% of the Gross Nation al Product (GNP) ), debts (the national debt cannot be more than 60% of the GNP), stability of exchange rates (a national currency cannot have been undervalued within the last two years and must remain in the fluctuation region of 2.5% as seen by the European Monetary System).