The success of this monetary union which created a federal Germany was based upon a common language and culture. Between and , there was the Latin Monetary Union which was fairly successful until socialistic ideas began to take hold and government debts began to rise. England is the only country that never participated in European monetary unions schemes. For this reason, the history of the pound sterling extends back about 1, years compared to most European currencies which date back only to the end of the Second World War.
In , the Werner report also set up the goal of achieving a monetary union in three steps, but it did not work out, mainly because countries would not want to cooperate and also because of the oil price shock, which changed the international monetary environment drastically. Today the conditions are entirely different: since the experience of the European Monetary System has shown that co-operation is mutually beneficial.
The aims and instruments of monetary policy are comparable in all member states.
EMU candidates must fulfil the following convergence criteria, in order to be able to participate in EMU:. Firstly, the average inflation rate of a country must not exceed that of the three best performing countries in terms of price stability by more than 1. Secondly, a member state's currency must have participated in the Exchange Rate Mechanism ERM of the EMS and kept within its normal fluctuation margins without severe tensions for at least the last two years before the examination. The convergence examination will, therefore, assess actual exchange rate stability.
Formal participation in the exchange rate mechanism is, however, a binding condition of the Treaty. Thirdly, the average nominal long-term interest rate of a member state, measured in terms of the length on long-dated government bonds, must not exceed the corresponding average rates in the three countries with the lowest inflation rates by more than two percentage points for the period of one year before the examination. This criterion assesses the respective stability policy of the countries on the financial markets: if interest rates in one country are substantially higher than elsewhere, in most cases the basic expectation is for higher inflation rates.
Fourthly, member states must avoid excessive government deficits. The recent history of European Monetary Union EMU shows the constant search by the Member States of the Union for deeper monetary cooperation as a way of strengthening the single market. May 31st, European Commission Green Paper on the practical arrangements for the introduction of the single currency. The Council adopts the changeover scenario. January 1 Irrevocable fixing of conversion rates. The euro becomes a currency in its own right. At this point of time there are hardly any countries which meet all the conditions for participation in EMU.
Most countries still have very high budget deficits as a result of the slowdown in economic growth and rising social spending.
Consequently, the EMU timetable is at risk. It is, however, overlooked here that the timetable should also be seen as an incentive to qualify for EMU.
So as long as the deadline is still possible to reach there is no justifiable reason to call it into question. Last but not least, the EU heads of state and government explicitly confirmed the timetable for EMU at their summit in Madrid at the end of I begin with the realistic expectation that EMU will ensure price stability. Price stability is laid down in the Maastricht Treaty as the primary objective of the single monetary policy, to be explicitly incorporated in the statutes of participating national central banks.
The European System of Central Banks ESCB will enjoy full independence to determine the appropriate level of interest rates in order to satisfy this requirement of the Treaty. Moreover, the members of the ECB's Executive Board and the Governors of the participating national central banks, who will together form the ECB Governing Council, will have long terms of office and will only be dismissible for serious misbehaviour or inability to perform their duties. These provisions imply that the concept of monetary stability will benefit from explicit legal protection.
Benefits and potential risks
The ECB should also get reputational benefits, inherited from its constituent central banks. It is important to notice, that as a result of generally conservative monetary policies for a number of years, the average rate of inflation in the EU is now just a little above two percent. Europe is experiencing high unemployment after there has been economic recession and every country is trying to solve this problem in a different way.
European Monetary Union is part of the solution, but it looks like if the public is more concerned with the development of a single currency rather that it can see the benefits of such kind of union. The benefits of price stability are increasingly appreciated. There is growing awareness that inflation, and inflation uncertainty, lead to a misallocation of resources, and therefore the maintenance of price stability is associated with significant efficiency gains, and longer-term benefits to growth.
For some countries, where inflation expectations may still be higher due to their shorter track record in terms of monetary stability, EMU will also bring lower interest rates, thus providing a stimulus to investment and to growth in the whole European area. There should also be benefits from EMU in terms of a reduction in the costs of disinflation following inflationary "shocks".
A further important benefit of EMU is that it will remove the risk of serious real exchange rate variations. These may not only hinder economic growth and give rise to a misallocation of resources; they may also enable protectionism and, therefore, pose a threat to free trade. Such variations are particularly devastating in Europe given the level of economic integration; it was proven that sudden sharp falls in currencies such as the lira and sterling some time ago immediately led to - rather isolated - calls for protection and compensation.
Two facts are important here: Inside Europe there was a spectacular downward convergence of inflation rates achieved. And at the same time, the Single Market implies generalised competition and constant pressure on profit margins. In such a surrounding even relatively small nominal exchange rate movements turn into bad proportion , with large effects on trade flows and business planning. Short-term exchange rate volatility inside the EU will also be eliminated.
Such volatility can again have a direct effect on trade and investment, as is shown by most empirical studies. In any event, the argument that the increased use of hedging instruments makes such volatility a matter of indifference seems exaggerated. It may not even be optimal to fully protect against a single type of risk, since it may leave the firm more exposed to other types of risk.
Equally, those costs form an additional layer of protection for national producers; a single currency will make prices across the European area more transparent and directly comparable, which should increase competition and therefore efficiency and strengthen the progress towards a Single Market. For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bibliothek.
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