BE_13 Economic & Monetary Union

8/13/2019 BE_13 Economic & Monetary Union

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TASK 4C

Sources:

BPP Business Environment Coursebook (pages 303-306)


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What is EMU?

A monetary union is an arrangement where severalcountries have agreed to share a single currency amongst

themselves. The European Economic and Monetary

Union (EMU) consists of three stages coordinating

economic policy, achieving economic convergence (that

is, their economic cycles are broadly in step) andculminating with the adoption of the euro, the EU's single

currency. All member states of the European Union are

expected to participate in the EMU.

The Copenhagen criteria is the current set of conditions of

entry for states wanting to join the EU. It contains the

requirements that need to be fulfilled and the time

framework within which this must be done in order for a

country to join the monetary union. An important elementof this is the European Exchange Rate Mechanism


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What is EMU?

All member states, except Denmark and the UnitedKingdom, have committed themselves by treaty to

join EMU. Sixteen member states of the European

Union have entered the third stage and have adopted

the euro as their currency. Denmark, Estonia, Latvia,

and Lithuania are the current participants in the

exchange rate mechanism. Of the pre-2004

members, the United Kingdom and Sweden have not

joined ERM II and Denmark remains in ERM without

proceeding to the third stage. The five remaining(post-2004) states have yet to achieve sufficient

convergence to participate. These eleven EU

members continue to use their own currencies.


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What is EMU?

Stage One: 1 July 1990 to 31 December 1993 On 1 July 1990, exchange controls were abolished, thus capital

movements were completely liberalised in the European

Economic Community.

The Treaty of Maastricht in 1992 establishes the completion of

the EMU as a formal objective and sets a number of economicconvergence criteria, concerning the inflation rate, public

finances, interest rates and exchange rate stability.

The treaty enters into force on the 1 November 1993.


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What is EMU?Stage Two: 1 January 1994 to 31 December 1998

The European Monetary Institute is established as theforerunner of the European Central Bank, with the task of

strengthening monetary cooperation between the member

states and their national banks, as well as supervising ECU

banknotes.

On 16 December 1995, details such as the name of the newcurrency (the euro) as well as the duration of the transition

periods are decided.

On 16-17 June 1997, the European Council decides at

Amsterdam to adopt the Stability and Growth Pact, designed to

ensure budgetary discipline after creation of the euro, and a newexchange rate mechanism (ERM II) is set up to provide stability

above the euro and the national currencies of countries that

haven't yet entered the eurozone.

On 3 May 1998, at the European Council in Brussels, the 11

initial countries that will participate in the third stage from 1Januar 1999 are selected.


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What is EMU?Stage Three: 1 January 1999 and continuing

From the start of 1999, the euro is now a real currency, and asingle monetary policy is introduced under the authority of the

ECB. A three-year transition period begins before the

introduction of actual euro notes and coins, but legally the

national currencies have already ceased to exist.

On 1 January 2001, Greece joins the third stage of the EMU.

The euro notes and coins are introduced in January 2002.

On 1 January 2007, Slovenia joins the third stage of the EMU.

On 1 January 2008, Cyprus and Malta join the third stage of the

EMU. On 1 January 2009, Slovakia joins the third stage of the EMU.


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Theadvantages of an EMU membercountries

If everything goes to plan, by 2002, participating member states of theEuropean Union will have ditched their national currency in favour of

the euro, a single European currency. The advantages and

disadvantages of joining the European Monetary Union (Emu) will vary

from country to country, and are difficult to predict. Within the EU, each

member state has its own financial system; therefore the introduction of

the Euro will make a different impact on each country's economy. Buteconomists say that there are a number of advantages in signing up to

the euro:

Currency stability

A single currency should end currency instability in the participatingcountries (by irrevocably fixing exchange rates) and reduce it outside

them.

Because the euro would have the enhanced credibility of being used in

a large currency zone, it would be more stable against speculation than

individual currencies are now.

An end to internal currency instability and a reduction of external


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Theadvantages of an EMU membercountries

Tourism Consumers would not have to change money when travelling within the

euro zone, and would encounter less red tape when transferring large

sums of money across borders.

Travellers will no longer be forced to change money and pay banks the

commission charges.

A consumer might wish to make one large purchase or transaction

across a European border such as buying a holiday home or a piece of

furniture. A single currency would help such transactions pass

smoothly.

Business benefits

Likewise, businesses would no longer have to pay hedging costs which

they do today in order to insure themselves against the threat of

currency fluctuations.

Businesses, involved in commercial transactions in different member

states, would no longer have to face the costs of accounting in differentcurrencies.


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Pros and Cons of Joining EMU

Advantages

1. Economic policy stability

2. Facilitation of trade

3. Lower interest rates

4. Preservation of the Citysposition:

Disadvantages

1. Loss of national control over economic

policy

2. The need to compensate 3. Confusion in

the transition to EMU:

4. Lower confidence arising from loss of

national pride


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Task 4c

Explain the economic implications for the UK of entryinto EMU.

To answer this task, follow this guideline:

1. What is EMU?

2. The advantages of an EMU member countries

3. Pros and cons of joining EMU4. Express your own idea: Should UK enter into

EMU? Explain.

(Write a Business Report)

BE_13 Economic & Monetary Union

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