The European Monetary Union. Why and how it has happened?

Résumé du document

The idea of creating a huge integrated area in Europe, known as the European Economic Community, was born in 1954. Almost half a century later, the European Monetary Union became the most well-known example of financial and monetary integration in the world. According to Bela Belassa, a Hungarian economist, who is one of the most productive students of economic integration, the five levels of economic integration can be distinguished as follows: Firstly, by establishing a Free-trade union where tariffs and trade restrictions are abolished among the participants, while each country retains its own tariffs against non-member states. Secondly, a Customs union should be set up that aims at equalization of tariffs in trade with non members. Thirdly, a Common market which enables mobility of production factors within the states is needed. The fourth level is the establishment of an Economic union that endeavors to achieve harmonization of the economic policies of the state members.

Extraits

[...] The Werner Plan of 1970, and which came into effect in 1972, was consequently a compromise. The aim was to harmonize economic policies, but above all it created the “snake in the tunnel”, a system of fixed exchange rates between the former six participants and Britain, Denmark and Ireland, with fluctuation bands of around the declared central parity. But the plan collapsed during the oil crisis in 1974. The main explanation might be that the European countries were in fact unwilling subordinate their own interests to those of the European integration.” The second stage consisted in the European Monetary System, EMS, which came into effect in 1979. [...]

[...] The EMU also reduces transaction costs, uncertainty and risk for capital movements, while it increases the “transparency of prices”, thanks to the use of a same currency. Moreover, it may offer vulnerable states the possibility to enjoy the stability and credibility that mainly Germany and some other states had known before. And last but not least, it affords the EU citizens the benefits of possessing a major international currency, benefit up to now mainly enjoyed by US citizens. On the other hand, the EMU may be seen as a response to globalization, according to Lintner[9]: it enables to increase the effectiveness of economic policy-making in the context when national control over macroeconomic policy has decreased, because of globalization and deregulated international capital markets. [...]

[...] But this rule might appear since it does not make any difference between “socially productive spending” and “ill-designed investment spending” The difficulty to meet the Maastricht requirements: As said before, it has appeared to be very hard for some member states to fulfil the requirements, regarding their rates of budget deficits (cf annexed table). The first case of a Council recommendation concerned Ireland's budgetary policy in 2001. Ireland comfortably fulfilled the stability and growth pact obligations with a budgetary surplus of about of GDP and a low level of public indebtedness The second country enable to meet the criteria was the Portugal, which deficit outcome for 2001 was estimated at of GDP. Then Germany was warned, and the Commission urged the German authorities to ensure strict budgetary implementation at all levels of government. [...]

[...] Frieden and Lake Dyson; Elusive Union” London, Longman Haas, uniting of Europe” Oxford, Oxford universitary press Arthur, “Self-Reinforcing mechanisms in economics Wyplosz why and how it might happen”, in Frieden and Lake. Cohen Triad and the Unholy Treaty”; in Frieden and Lake. Pauly “Capital Mobility and the new global order”, in Stubbs and Underhill. Valerio Lintner, in Richardso, “European Union, power and policy- making” R. Mundell, A theory of optimum currency areas American economic review. Stability and growth pact implementation and key figures, www.europa.eu.int Wyplosz Lintner in Stubbs and Underhill Le Cacheux ; L'euro, monnaie internationale ? in Monnaie et politique monetaire en Europe ; cahiers Français n°297. [...]

[...] But the rigidity of the Stability and Growth Pact still remains the subject of a huge debate among member states (cf 2.2 .2) 2 Perspectives on the future: 1 Changes to be done, potential improvements According to the OFCE, the inadequacy between the political integration and the economic integration is problematic. Thus, the EMU should go in the direction of: Common game rules so as to avoid a social dumping Convergence of the productive structures thanks to structural founds, by taking into account the necessity to increase the EU budget, so as to go further than structural founds as far as redistribution is concerned. But a real convergence of the economies, not only a nominal convergence of the inflation and interest rates, deficits and public debts. [...]