Tag Archives: Economy and currency

Towards a single currency: a brief history of EMU

Towards a single currency: a brief history of EMU

Outline of the Community (European Union) legislation about Towards a single currency: a brief history of EMU

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Practical aspects of introducing the euro

Towards a single currency: a brief history of EMU

The first appeal for a European currency prior to the 1929 crash

On 9 September 1929 the German politician Gustav Stresemann asked the League of Nations the following question “Where are the European currency and the European stamp that we need?” Six weeks later, on 25 October, the New York Stock Exchange experienced its “Black Friday”: the international economic crisis began. It caused enormous economic upheaval internationally, business closures and an unprecedented level of unemployment.

The States responded to the crisis with a policy of “beggar-thy-neighbour”, taking deflationary measures to boost export competitiveness and introducing tariff barriers for products imported from abroad. This policy made the economic crisis worse. While in the short term it was beneficial to the State concerned, in the long term it had serious economic consequences: inflation, falling demand, rising unemployment and slower growth in world trade.

The end of the Second World War: a new start

In 1944, while the Second World War was still laying waste to Europe, a conference on the restructuring of international financial and monetary relations took place at Bretton Woods in the United States. Over forty countries participated: on 22 July 1944 they signed the Bretton Woods Agreements. These agreements lay down rules and procedures governing the world economy. They led to the establishment of the International Bank for Reconstruction and Development (“BIRD”, which has now become part of the World Bank) and the International Monetary Fund. Furthermore, the Bretton Woods Agreements put in place the gold standard monetary system. This system provides stable exchange rates based on gold which becomes the reference standard. Only the US dollar is convertible into gold and the other currencies are indexed to the dollar.

The world underwent profound changes after the Second World War. The experiences of war gave rise to an awareness that international cooperation was crucial to avert further suffering. The United Nations (UN) was thus set up in 1945. In Europe, the first foundations for what would later become the European Union were laid by three Treaties bringing together six signatory States (Germany, Belgium, France, Italy, Luxembourg and the Netherlands):

  • the Treaty establishing the European Coal and Steel Community (ECSC), signed on 18 April 1951;
  • the Rome Treaties, i.e. the Treaty establishing the European Economic Community (EEC) and the Treaty establishing the European Atomic Energy Community (EURATOM), signed in March 1957.

Creation of Economic and Monetary Union

At the summit in The Hague in December 1969, the Heads of State and Government defined a new objective of European integration: Economic and Monetary Union (EMU). A high-level group chaired by Pierre Werner, Prime Minister of Luxembourg, was thus given the task of drawing up a report on how this goal might be reached by 1980.

The Werner group submitted its final report in October 1970. It envisaged the achievement of full economic and monetary union within ten years according to a plan in several stages. The ultimate goal was to achieve full liberalisation of capital movements, the total convertibility of Member States’ currencies and the irrevocable fixing of exchange rates. The report therefore envisaged the adoption of a single European currency as a possible objective of the process, but did not yet regard it as a goal in itself. Furthermore, the report recommended that the coordination of economic policies be strengthened and guidelines for national budgetary policies drawn up.

In March 1971, although being unable to agree on some of the key recommendations of the report, the Six gave their approval in principle to the introduction of EMU in several stages. The first stage, involving the narrowing of currency fluctuation margins, was launched on an experimental basis and did not entail any commitment regarding the continuation of the process.

The collapse of the Bretton Woods system and the decision of the US Government to float the dollar in August 1971 produced a wave of instability on foreign exchanges which called into serious question the parities between the European currencies. The EMU project was brought to an abrupt halt.

In March 1972 the Six attempted to impart fresh momentum to monetary integration by creating the “snake in the tunnel“: a mechanism for the managed floating of currencies (the “snake”) within narrow margins of fluctuation against the dollar (the “tunnel”). Thrown off course by the oil crises, the weakness of the dollar and the differences in economic policy, the “snake” lost most of its members in less than two years and was finally reduced to a “mark” area comprising Germany, the Benelux countries and Denmark.

Creation of the European Monetary System (EMS)

Efforts to establish an area of monetary stability were renewed in March 1979, at the instigation of France and Germany, with the creation of the European Monetary System (EMS), based on the concept of fixed, but adjustable exchange rates. The currencies of all the Member States, except the United Kingdom, participated in the exchange-rate mechanism.

The principle was as follows: exchange rates were based on central rates against the ecu (“European Currency Unit”), the European unit of account, which was a weighted average of the participating currencies. A grid of bilateral rates was calculated on the basis of these central rates expressed in ecus, and currency fluctuations had to be contained within a margin of 2.25 % either side of the bilateral rates (with the exception of the Italian lira, which was allowed a margin of 6 %).

Over a ten-year period, the EMS did much to reduce exchange-rate variability: the flexibility of the system combined with the political resolve to bring about economic convergence, achieved sustainable currency stability.

With the adoption of the Single Market Programme in 1985, it became increasingly clear that the potential of the internal market could not be fully exploited as long as relatively high transaction costs linked to currency conversion and the uncertainties linked to exchange-rate fluctuations, however small, persisted. Moreover, many economists denounced what they called the “impossible triangle”: free movement of capital, exchange-rate stability and independent monetary policies were incompatible in the long term.

Introduction of the EMU

In June 1988 the Hanover European Council set up a committee to study economic and monetary union under the chairmanship of Jacques Delors, the then President of the European Commission. The other members of the committee were the governors of the national central banks, who were therefore closely involved in drawing up the proposals.

The committee’s report, submitted in April 1989, proposed to strengthen the introduction of the EMU in three stages. In particular, it stressed the need for better coordination of economic policies, rules covering national budget deficits, and a new, completely independent institution which would be responsible for the Union’s monetary policy: the European Central Bank (ECB).

On the basis of the Delors report, the Madrid European Council decided in June 1989 to launch the first stage of EMU: full liberalisation of capital movements by 1 July 1990.

In December 1989 the Strasbourg European Council called for an intergovernmental conference that would identify what amendments needed to be made to the Treaty in order to achieve the EMU. The work of this intergovernmental conference led to the Treaty on European Union, which was formally adopted by the Heads of State and Government at the Maastricht European Council in December 1991 and signed on 7 February 1992.

The Treaty provides for the EMU to be introduced in three stages:

  • stage No 1: (from 1 July 1990 to 31 December 1993): the free movement of capital between Member States;
  • stage No 2: (from 1 January 1994 to 31 December 1998): convergence of Member States’ economic policies and strengthening of cooperation between Member States’ national central banks. The coordination of monetary policies was institutionalised by the establishment of the European Monetary Institute (EMI), whose task was to strengthen cooperation between the national central banks and to carry out the necessary preparations for the introduction of the single currency. The national central banks were to become independent during this stage;
  • stage No 3: (underway since 1 January 1999): the gradual introduction of the euro as the single currency of the Member States and the implementation of a common monetary policy under the aegis of the ECB. Transition to the third stage was subject to the achievement of a high degree of durable convergence measured against a number of criteria laid down by the Treaties. The budgetary rules were to become binding and a Member State not complying with them was likely to face penalties. A single monetary policy was introduced and entrusted to the European System of Central Banks (ESCB), made up of the national central banks and the ECB.

The first two stages of EMU have been completed. The third stage is currently underway. In principle, all EU Member States must join this final stage and therefore adopt the euro (Article 119 of the Treaty on the Functioning of the EU). However, some Member States have not yet fulfilled the convergence criteria. These Member States therefore benefit from a provisional derogation until they are able to join the third stage of EMU.

Furthermore, the United Kingdom and Denmark gave notification of their intention not to participate in the 3rd stage of EMU and therefore not to adopt the euro. These two States therefore have an exemption with regard to their participation in EMU. The exemption arrangements are detailed in the protocols relating to these two countries annexed to the founding Treaties of the EU. However, the United Kingdom and Denmark reserve the option to end their exemption and submit applications to join the 3rd phase of EMU.

Currently, 17 of the 27 Member States have joined the third stage of EMU and therefore have the euro as a single currency.

Iceland – Economic and Monetary Policy

Iceland – Economic and Monetary Policy

Outline of the Community (European Union) legislation about Iceland – Economic and Monetary Policy

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Economic and monetary affairs: enlargement

Iceland – Economic and Monetary Policy

acquis) and, more specifically, the priorities identified jointly by the Commission and the candidate countries in the analytical assessment (or ‘screening’) of the EU’s political and legislative acquis. Each year, the Commission reviews the progress made by candidates and evaluates the efforts required before their accession. This monitoring is the subject of annual reports presented to the Council and the European Parliament.

Document or Iniciative

Commission Report [COM(2011) 666 final – SEC(2011) 1202 final – Not published in the Official Journal].

Summary

The 2011 Report highlights that the country’s level of alignment with the European Union (EU) acquis remains incomplete on economic and monetary policy.

EUROPEAN UNION ACQUIS – (according to the Commission’s words)

EU legislation on economic and monetary policy contains specific rules requiring the independence of central banks in Member States, prohibiting direct financing of the public sector by the Central Bank and prohibiting privileged access of the public sector to financial institutions. Upon accession, new Member States will be expected to coordinate their economic policies and will be subject to the provisions of the Stability and Growth Pact on budget monitoring matters. These States are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro. Until their adoption of the euro, they will participate in Economic and Monetary Union as a Member State with derogation and will treat their exchange rates as a matter of common concern.

EVALUATION (according to the Commission’s words)

Some progress has been achieved by Iceland in the field of economic policy; however additional effort is required to improve its coordination with the EU’s policies. No new development has been noted in the field of monetary policy, the field in which alignment must be completed, particularly concerning the independence of the Central Bank and the prohibition of monetary financing of the public sector.

The country achieved a good level of alignment concerning the financial and budgetary rules. The country continued to identify the fields which still need to be aligned. Preparations connected with administrative capacity and for setting up the own resources system must be completed. A coordination structure needs to be formally established.

Croatia – Economic and monetary affairs

Croatia – Economic and monetary affairs

Outline of the Community (European Union) legislation about Croatia – Economic and monetary affairs

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Economic and monetary affairs: enlargement

Croatia – Economic and monetary affairs

acquis) and, more specifically, the priorities identified jointly by the Commission and the candidate countries in the analytical assessment (or ‘screening’) of the EU’s political and legislative acquis. Each year, the Commission reviews the progress made by candidates and evaluates the efforts required before their accession. This monitoring is the subject of annual reports presented to the Council and the European Parliament.

Document or Iniciative

Commission Report [COM(2010) 660 final – SEC(2010) 1326 – Not published in the Official Journal].

Summary

The 2010 Report presents the reforms that have advanced the general level of alignment with the acquis, despite the international financial and economic crisis. However, alignment is not complete and the policy of economic and monetary coordination should be improved.

EUROPEAN UNION ACQUIS (according to the Commission’s words)

EU legislation on Economic and Monetary Union (EMU) contains specific rules requiring the independence of central banks in Member States, prohibiting direct financing of the public sector by the central banks and privileged access of the public sector to financial institutions. Moreover, all Member States are bound to lay down specific measures necessary for the protection of the euro against counterfeiting. These rules must have been implemented by the date of accession. Upon accession, new Member States will be expected to coordinate their economic policies and will be subject to the provisions of the Stability and Growth Pact and the Statute of the European System of Central Banks. They are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro. Until they adopt the euro, they will participate in Economic and Monetary Union as a Member State with a derogation and will treat the exchange rate of their currency as a matter of common concern.

EVALUATION (according to the Commission’s words)

There has been further progress in the area of economic and monetary policy where, overall, alignment with the acquis is effectively complete.

The economy of Croatia has been severely affected by the global economic and financial crisis. The country fell into recession in the first quarter of 2009 and there were no clear signs of a recovery by mid-2010. Unemployment, public deficit and debt have increased significantly. External indebtedness rose further and remains a key vulnerability of the economy. Monetary stability was preserved by the policies of the central bank and the financial sector weathered the crisis relatively well.

Broad political consensus on the fundamentals of a market economy was maintained. The Economic Recovery Programme has given economic policy a medium-term orientation. The programme’s benefit for growth and international competitiveness depends on its effective implementation. Given the existing constraints, macroeconomic policy has, by and large, been appropriate to address the consequences of the global economic and financial crisis. Monetary policy succeeded to preserve exchange rate and financial stability while alleviating liquidity pressures. The current account deficit narrowed as a consequence of the recession and inflationary pressures subsided further. The banking sector remained resilient to shocks.

However, structural reforms generally advanced at a very slow pace, not least with respect to privatisation and the restructuring of loss-making enterprises. The labour market remained highly rigid, with low employment and participation rates which declined further during the recession.

In the fiscal area, the authorities made limited efforts to contain the rising deficit and to increase the efficiency of public spending. Social transfer payments remained high and not well-targeted and a large number of state-owned enterprises continued to receive State support through direct and indirect subsidies and guarantees. For achieving medium-term fiscal sustainability, it remains a key challenge to improve the budgetary process and discipline and to enhance the efficiency of public spending. The investment climate continued to suffer from a heavy regulatory burden and numerous para-fiscal taxes.

Related Acts

Commission Report [COM(2009) 533 final – SEC(2009) 1333 final – Not published in the Official Journal].

Commission Report [COM(2008) 674 final – SEC(2008) 2694 final – Not published in the Official Journal].

The 2008 Report noted significant progress and that alignment with the acquis had reached a satisfactory level in the areas of budget and finance. New regulations and procedures were necessary to increase the efficiency of public expenditure and administrative capacity.

Commission Report [COM(2007) 663 final – SEC(2007) 1431 – Not published in the Official Journal].
The 2007 Report recorded major progress in alignment with the acquis in the area of “economic and monetary affairs”. However, the Commission observed that Croatia had not yet completed the necessary alignment.

Commission Report [COM(2006) 649 final – Not published in the Official Journal].
The 2006 Report did not observe any progress in the area of monetary policy. Croatia should continue to make headway with introducing indispensable changes to its institutional and legal system, especially as regards the total independence of its Central Bank. However, in the area of economic policy, the country had made some progress in its alignment with the acquis.

Commission Report [COM(2005) 561 final – SEC(2005) 1424 – Not published in the Official Journal].
The 2005 Report observed that the country should be capable of coping with competition and market forces within the Union. Inflation was kept relatively low, the exchange rate seemed to have stabilised; the substantial deficits which existed in the public accounts and current transactions had been reduced. However, Croatia needed to take steps to consolidate public finances, notably through structural measures in the area of subsidies and transfer payments. The privatisation process speeded up in 2005. On the other hand, little progress had been made with the reorganisation of the major public companies, especially those in the energy sector. Telecoms deregulation, on the other hand, was proving a great success.

Commission Opinion [COM(2004) 257 final – Not published in the Official Journal].
In its Opinion of 20 April 2004, the Commission concluded that Croatia was a stable democracy with a functioning market economy and that it must be able to meet the demands stemming from the Community acquis in the field of economic and monetary union (EMU). The same was true of provisions on monetary financing, privileged access by public authorities to financial institutions and the protection of the euro. As regards Croatia’s participation in the third stage of EMU, the Commission took the view that it had enough time to prepare for participation as a Member State subject to a derogation.