Tag Archives: Monetary economics

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

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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.

Turkey – Economic and Monetary Policy

Turkey – Economic and Monetary Policy

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

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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

Turkey – 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) 1201 – Not published in the Official Journal].

Summary

The 2011 Report notes a robust economic recovery in Turkey. The market economy is functioning and is able to cope with competitive pressure. However, the Report regrets to report a rise in trade account deficits, and external imbalances. Some structural reform needs to be implemented.

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)

The economy of Turkey is currently experiencing a robust economic recovery. Public finances are improving and confidence in a lasting transformation of the country’s economic prospects and stability is increasing. Nevertheless, the rapid expansion of economic activity, driven by strong domestic demand, has led to significant and rising external imbalances that pose a threat to macroeconomic stability.

As regards the economic criteria, Turkey is a functioning market economy. It should be able to cope with competitive pressure and market forces within the Union in the medium term, provided that it accelerates the implementation of its comprehensive structural reform programme.

The economy expanded rapidly in 2010 and in the first half of 2011. Along with the high GDP growth, strong employment growth allowed for a decrease in unemployment. As a result of primarily higher cyclical revenues and a lower interest burden, the consolidation of public finances remained on track. The financial sector has shown considerable strength thanks to earlier reforms while the legal system continues to function relatively well. Moreover, the new law on State aid monitoring and the operation of the regulatory authority may increase transparency and lead to a reduction of State aid. The free interplay of market forces has been confirmed. Privatisation has accelerated. The EU remains Turkey’s most important trade partner and investor.

However, trade and current account deficits have been rising and external imbalances are now significant. Monetary policy has been only mildly successful in curbing credit growth, which along with high commodity prices, continues to feed Turkey’s growing current account deficit. More support from the fiscal side, and some specific and targeted micro-prudential measures are being elaborated, including by the banking regulator, in order to help engineering a soft landing of the economy and ease the burden placed on monetary policy. Turkey’s price and cost export competitiveness has slightly worsened. Inflation has started to rise, in large part due to pressures stemming from energy and food inputs, buoyant economic activity and hikes in administrative prices. A more resolute implementation of structural reforms is awaited. Measures to increase fiscal transparency and better anchor fiscal policy were modest, while they could help Turkey to gain credibility in the markets. Market exit remains difficult and bankruptcy proceedings are still relatively cumbersome.

Turkey has made some progress on economic and monetary policy. The Central Bank adopted a new policy mix to ensure financial stability, reducing policy rates while increasing reserve requirements for the banking sector. Turkey’s alignment with the acquis on economic and monetary policy is not complete, particularly as regards the full independence of the Central Bank and the prohibition of privileged access of the public sector to financial institutions. The overall level of preparedness is advanced.

Related Acts

Commission Report [COM(2010) 660 final – SEC(2010) 1327 – Not published in the Official Journal].
The 2010 Report presented the economic and monetary strategies adopted by the country following the international financial crisis. The authorities have also been very active in improving their economic relations at international level and cooperation with neighbouring States. However, progress was still required in aligning Turkish legislation with the acquis, particularly in the financial institutions sector.

Commission Report [COM(2009) 533 final – SEC(2009) 1334 – Not published in the Official Journal].

Commission Report [COM(2008) 674 final – SEC(2008) 2699 – Not published in the Official Journal].

The November 2008 Report highlighted the continuing problems. The Central Bank was still not totally independent and monetary financing of the public sector and privileged access of public authorities to financial markets were maintained. However, measures taken to coordinate and reform economic and monetary policy have enabled the country to progress towards a more stable macroeconomic framework.

Commission Report [COM(2007) 663 final – SEC(2007) 1436 – Not published in the Official Journal].
The November 2007 Report found that progress had been made as regards economic and monetary policy. However, certain steps had still not been taken, in particular provisions for the independence of the Central Bank. The European Commission also noted that economic policy formulation remained fragmented and often insufficiently coordinated. In general, preparations in the field of economic and monetary affairs were at an advanced stage.

Commission Report [COM(2006) 649 final – SEC(2006) 1390 – Not published in the Official Journal].
The November 2006 Report found that Turkey had made little progress as regards monetary policy but rather more in terms of economic policy. Legislation to prevent monetary financing of the public sector and to prohibit privileged access of public authorities to financial institutions was not in line with the acquis. The absence of economic impact assessments and efficient coordination and cooperation reduced the effectiveness of economic policy.

Commission Report [COM(2005) 561 final – SEC(2005) 1426 – Not published in the Official Journal].
The November 2005 Report noted some progress in the field of economic policy. Alignment on the acquis in the monetary policy field remained limited. However, the capacity to implement an effective economic and monetary policy was still held back by the lack of an effective system for coordinating formulation, cooperation and implementation.

Commission Report [COM(2004) 656 final – SEC(2004) 1201 – Not published in the Official Journal].
Its October 2004 Report found that Turkey had made no progress in adopting the EMU acquis, covering direct public-sector financing by the Central Bank, prohibition of privileged access by the public sector to financial institutions, and the independence of the Central Bank.

Commission Report [COM(2003) 676 final – SEC(2003) 1212 – Not published in the Official Journal].

In its November 2003 Report the Commission noted that no progress had been made in this field.

Commission Report [COM(2002) 700 final – SEC(2002) 1412 final – Not published in the Official Journal].
Its October 2002 Report found that no further progress had been made as regards direct public-sector financing by the Central Bank. The same was true of the prohibition on privileged access by the public sector to financial institutions and the independence of the Central Bank.

Commission Report [COM(2001) 700 final – SEC(2001) 1756 final – Not published in the Official Journal].
In its November 2001 Report the Commission found that Turkey had made progress in the adoption of the economic and monetary union (EMU) acquis.

Commission Report [COM(2000) 713 final – Not published in the Official Journal].
The Commission’s November 2000 Report found that little progress had been made in the area of economic and monetary policy.

Commission Report [COM(1999) 513 final – Not published in the Official Journal].

Commission Report [COM(1998) 711 final – Not published in the Official Journal].

Economic and Monetary Affairs

Economic and Monetary Affairs

Outline of the Community (European Union) legislation about 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

Economic and Monetary Union (EMU), as provided for in Title VII of the Treaty establishing the European Community, involves close coordination of the economic policies of the Member States at European level and requires Member States to avoid excessive budget deficits (“Stability and Growth Pact”). EMU has led to the introduction of a single currency: the euro.

Economic and Monetary Affairs Contents

  • Practical aspects of introducing the euro:The citizen and the euro, Euro notes and coins, Information strategy, Summaries, Historical aspects: from stage one to stage three (1990-1999), Brief history of Economic and Monetary Union (EMU)
  • Institutional and economic framework of the euro: EMU key institutions, Euro member countries, Relations with non-member countries, Legal status of the euro, Economic convergence
  • Stability and growth pact and economic policy coordination: Foundation and implementation of the Stability and Growth Pact, Coordination of Member States’ economic policy.
  • Economic and monetary affairs: enlargement: The impact of enlargement on the euro zone, candidate countries, the Enlargement of May 2004