University of Oradea

Faculty of History, International Relations, Political Sciences and Communication Sciences International Relations and European Studies

25th May 2012

The Economic and Monetary Union

Coordinating teacher: Pop Cosmin Adrian

Students: Dejeu Dora-Natalia Vidican David Gabriel

1. Introduction
The Economic and Monetary Union (EMU) is an umbrella term (a term used to describe 'multiple terms' that fall under a single common category) for the group of policies aimed at converging the economies of members of the European Union in three stages so as to allow them to adopt a single currency, the euro. Whilst all 27 EU Member States take part in the economic union, some countries have taken integration further and adopted the euro. Together, these countries make up the euro area. The decision to form an Economic and Monetary Union was taken by the European Council in the Dutch city of Maastricht in December 1991, and was later enshrined in the Treaty on European Union (the Maastricht Treaty). Economic and Monetary Union takes the EU one step further in its process of economic integration, which started in 1957 when it was founded. Economic integration brings the benefits of greater size, internal efficiency and robustness to the EU economy as a whole and to the economies of the individual Member States. This, in turn, offers opportunities for economic stability, higher growth and more employment outcomes of direct benefit to EU citizens. The main aims of EMU are to: To finalize the competition of the internal market by removing exchange rate fluctuations and the cost inherent in exchange transactions, as well as the costs of hedging against currency fluctuation risks; To ensure comparability of costs and prices within the Union, which helps consumers, stimulates intra-community trade and facilitates business; To reinforce Europes monetary stability and financial power by: ending, by definition, any possibility of speculation between the Union currencies ensuring, through the economic dimension of the monetary union thus established that the new currency is largely invulnerable to international speculation enabling the euro to become a major reserve and payment currency All member states of the European Union are expected to participate in the EMU. The Copenhagen criteria are 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 element of this is the European Exchange Rate Mechanism ("ERM II"), in which candidate currencies demonstrate economic convergence by maintaining limited deviation from their target rate against the euro. All member states, except Denmark and the United Kingdom, have committed themselves by treaty to join EMU. Seventeen member states of the European Union, including, most recently, Estonia, have entered the third stage and have adopted the euro as their currency. Denmark, 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 ten EU members continue to use their own currencies.

The EMU in 2011

Members of the Eurozone ERM-II-member (Latvia, Lithuania) ERM-II-member (with opt-out Denmark) EU-member with opt-out (United Kingdom) The rest of the EU members

2. The Hague Conference 1969

The origins of the EMU can be traced right back to the Schuman Declaration, May 1950, which provided the base for the ECSC, and stated "The solidarity in production will make it plain that any war between France and Germany becomes not merely unthinkable, but materially impossible ... this proposal will build the first concrete foundation of a European federation which is indispensable to the preservation of peace". What followed was the Pleven Plan which aimed to establish the European Defence Community (Vanthoor 1999) but wasnt put into practice due to the termination from the French Assembly of August 1954. The Treaty of Rome Treaty establishing the European Economic Community (TEEC) was an international agreement that led to the founding of the European Economic Community on 1 January 1958, and signed on 25 March 1957 by Belgium, France, Italy, Luxembourg, the Netherlands and West Germany. During the 1960s the common market project, with the abolition of tariffs and quotas, was realized. No important new attempts at European integration were undertaken, mainly due to Gaullist resistance. But this situation changed at the end of the 60s when the customs union was being completed and the unease with the Bretton-Woods system was growing. At the end of the 60s doubts about the future of the fixed exchange rate system became widespread, especially with the devaluation of the French franc in 1969 and the vulnerable position of the American dollar. Countries of the Community feared that further exchange rate instability would lead to the disintegration of the customs union and the demise of the common agricultural policy. As a response, the European Commission elaborated a Memorandum on the coordination of economic policy and the creation of a Community mechanism for monetary cooperation, also known as the "Barre Plan" (Commission of the EEC, 1969). In July 1969 at the 76th session of the Council of the European Communities the French government proposed for a new meeting by the end of the year The Hague Conference of Head of State of Government in order to talk about new ways of consolidating and enlarging the Community. The summit was held at Ridderzaal in the centre of the Binnenhof by M. P. S. de Jong, Prime Minister of the Netherlands. The national delegations meet only on the afternoon of 1 December and on 2 December, with the Commission, represented by M. Rey and M. Martino. The results of the Summit Conference were analyzed on 11 December in Strasbourg by M. Rey, the President of the Commission of the European Communities, in front of the European Parliament during the annual Joint Meeting between the Community institutions. In his address, M. Jean Rey talks about the goals achieved during The Hague Conference and comments on the aspects of the European policy which still needed to be worked upon. Given the fact the Common Market was entering in its final stage before initiation, it was thought that the ones with the highest political responsibility from each Member State should present a summary of what has been already accomplished, which

would reflect the determination they have for future plans. The final stage in the development of the Common Market only meant that there was no turning back from the road to creating a united Europe. This Europe, even if it is composed of states with different nationalities, will become indispensable if a mainspring of development, progress and culture, world equilibrium and peace is to be preserved. The heads of State or Government agreed for their governments to pass from the transitional period to the final stage of the European Community and accordingly to lay down a definitive financial arrangement for the common agricultural policy by the end of 1969. They agreed the each Member State to contribute by their own resources to help finance integrally the Communities budgets, thus making way for the EEC, and increasing and consolidating the powers of the European Parliament. Everyone agreed that on the basis of the Memorandum from 12 February 1969 that a plan in stages would be created by the end of 1970 about creating an economic and monetary union, and to create a European reserve fund for the creation of the union. Interest was reaffirmed in the aspects of putting effort to create the European Atomic Energy Community designed in accordance with the exigencies of modern industrial management, and making it possible to ensure the most effective use of the Common Research Centre. Also interest was shown in establishing a European university, the reforming of a Social Fund, and reaffirmed the commitment on the principle of enlarging the Community, as provided in the Treaty of Rome on article 237.

3. The Werner Report 1970

The late 1960s Economic and Monetary Union came onto the agenda. With the completion of the customs union ahead of time in 1968 and the success of the common agricultural policy (CAP) at a time when the Bretton Woods system of fixed exchange rates was showing signs of stress, EMU looked to be a useful goal to consider. At this time the concept of EMU was economic and monetary policy integration in stages. Actors pushing for integration were the Commission heads of states and governments and finance ministers of the six Member States and various expert committees of the European Community. Two people in particular made important contributions to the development of EMU in stages: Raymond Barre, the EC Commissioner for economic and financial affairs, and Pierre Werner, Prime Minister and Finance Minister of Luxembourg. The Werner Report first presented a general picture of economic and monetary union. It proposed that two new Community institutions should be created: a centre of decisionmaking for economic policy and a Community system for the central banks. The plan to attain EMU was in three stages. However, it did not lay down a precise timetable for these different stages. Rather it wanted to maintain a measure of flexibility,

while concentrating on the first phase. The first stage should commence on 1 January 1971 and cover a period of three years. The main elements were: reinforcement of procedures for consultation and policy co-ordination; further liberalization of intra-Community capital movements and steps towards an integrated European capital market; narrowing of exchange rate fluctuations between Community currencies (creation of the "snake");

After its release, the Werner Report was heavily criticized by the orthodox Gaullists in France, affirming that it was centered on the supranational elements of the Report. It induced a change in the policy of the French government, contributing to a dilution of the proposals of the Report24. Thus, the creation of new Community institutions was dropped.

4. European Monetary System 1979

In the 1970s the plans for EMU do not take off. Plan after plan is made to change, revise, re-launch EMU but the time is never right. As a result, when a next step in economic and monetary integration is made in the late 1970s, European Monetary System, the concept of EMU is toned down. It now only focuses on exchange rates (phase one); a second phase is planned but is never implemented. It probably is safe to say that the interest of actors is to deal with the failure of securing an EC exchange rate mechanism. The so-called snake failed to work with all Member States. Actors pushing for this type of integration are the heads of states and governments in particular the French and West German leaders, and the new Commission President Jenkins. The institutional context also plays an important role. In 1978 the EC now has nine Member States including the more skeptical United Kingdom, Denmark and Ireland (that had close linkages to the UK). Another factor is that, not only did the snake fail to incorporate all EC member states, it also increasingly seem to work as a large Deutschmark zone. More generally enthusiasm for European integration is at a low at this time (eurosclerosis). During this time another exogenous shock takes place: the second oil crisis. The result is that overall economic conditions are poor. A change in leadership and paradigm (monetarism) takes place in the late 1970s in some places (Margaret Thatcher - UK; Volcker - US President of the Federal Reserve; Ronald Reagan - US). Overall the response to all these challenges is diverging policies in the leading European countries. The type of EMU envisaged at this point is a very restricted one. The hope is that with sufficient political support it would push the economic and monetary integration project to the next level.

5. Conclusions
Economic and Monetary Union went through six major stages in which the vision of EMU often was different from one period to the next. Actors pushing for it often included both Member States leaders, expert communities and the Commission. Also the direction was definitely not always towards more integration. Successful integration plans were followed by periods in which the plan did not materialize, after which a much more modest concept of EMU was sought after.

Bibliography

Werner report, EMS and EMU: Problems and Prospects of European Monetary Cooperation by Matthias Kaelberer, Princeton University, Dpt. of Politics National Bank of Belgium working papers research series on the origins of the Franco-German EMU controversies Economic and Monetary Union Memo prepared for the State of the European Union Vol. 8 meetings by Amy Verdun The Process of European Integration from The Hague to Maastricht, 1969-92: An Irreversible Advance? by Michael J. Geary www.cvce.eu The Hague Summit reproduced from the Bulletin of the European Communities, No.1, 1970 Interim report on The establishment by stages of Economic and Monetary Union