EUROPEAN MONETARY UNION

Evolution of the European Monetary Union

Complete and definitive giving up of the right to an autonomous monetary policy in all
member states. Inside EMU there is only one central bank and one common currency.
The european monetary system (1979) built on three pillars:
European currency unit ECU (was the unit of account, used to be calculated
daily and its value fluctuate due to fluctuations in exchange rates of the
member states currencies),
Exchange rate mechanism and
Credit mechanism
Delors report (1989) - ideological basis for the emergence of EMU
States in order to avoid currency tensions must execute the convergence of
their monetary policies
As necessary it was considered to determine the definite monetary parities
and the common currency adoption.

3 phases of EMU development

Completion of the single market, increase of monetary cooperation, accession to
monetary mechanisms of EMS
In May 1998, the EU council decided to fulfill the convergence criteria
(Greece - failed, suspension - 2 years)
United Kingdom, Sweden and Denmark have voluntarily refused to give up
their monetary sovereignty
In December 1995 the European Council endorsed the “euro” as the name of
the European currency unit and announced a series of steps within the
transition to the euro
1st of June 1998 - establishment of the European Central Bank
Euro has started to be used in a cashless payment system. On 1 January 2002 the
national currencies of the participating countries were completely replaced by new
currency euro
The changeover to Euro meant currency conversion, and not monetary
reform

EMU development
Within the EMS, the original exchange rate mechanism was replaced by the new mechanism
EMR II (exchange rate mechanism II), in which the currencies of EU Member States outside
the Euro area are linked to the euro with a standard fluctuation band of +/- 15%
Participation in this mechanism is voluntary. The EU treaty sets the obligation to follow the
fluctuation band of the exchange rate mechanism without significant tensions for at least two
years before entry the single currency area
After Slovenia had joined the EMU on 1 January 2007, the EMU had 13 members
Cyprus a Malty joined the EMU on 1 January 2008, the Emu had 15 members
Slovakia joined the EMU on 1 January 2009 as the 16th member.
Estonia joined the EmU on 1 january 2011 as the 17th country of EMU
Croatia joined the EMU on 1 January 2023 as the 20th country of EMU
 The institutions of the European Monetary Union
The European System of Central Banks (ESCB)
Formed by the European Central Bank (ECB) and 16 national central banks
(NCB) of Eurozone states —> Eurosystem + 11 NCB of EU member states
without Euro.
European central bank
Had replaced the European monetary institute
Is based in Frankfurt/Mohan in Germany
On 1 January 1999 took over responsibility for monetary policy from the 11
national central banks and began to create a unified monetary policy
Cross rates were locked in a fixed proportion to the common currency
The main objective is to maintain a price stability
National bank of Slovakia (NBS)
The cooperation of NBS along with ECB has begun in 2002
Since 1 January 2009 the Governor of the NBS has become a full
member of the Governing Council of the ECB. NBS is involved in
making decisions regarding the monetary policy within the euro area.

ECB tasks
Specifies the Eurosystem policy - the Governing Council is responsible for the
conduct of a monetary policy within the monetary area
Makes decisions on monetary policy and coordinates them - gives the NCBs
detailed instructions on how to perform various operations and supervies
Approves the issue of banknotes - strategic planning and coordination of production
and issuance of euro banknotes, provides safety and quality while being established
and maintained by the center for analysis of counterfeit euro banknotes
Intervention in the foreign exchange market - purchase and sale of securities on
foreign stock exchange markets
International and European cooperation - observer status in the international
monetary fund (IMF) as the only central bank in the world
To monitor financial risks

ECB
ECB bodies:
Board of Governors
Consists of: six members of the ECB executive board, along with all the
governors of the national central banks of the euro area
Two main activities:
Determines the monetary policy of Eurozone
Accepts the general principles and decisions important for enusring
the Eurosystem tasks implementation
The executive board - manages the current business of ECB
The General Council
ECB’s monetary policy and its instruments
 Open market operations
Automatic operations
Required reseves

Slovakia adopts the euro - the process and phases

The strategy of adopting the Euro in Slovakia
Worked out by NBS along with MF SR, approved by the goverment of SR
Particular steps thet should bring the country into the Eurozone
Due to expected assumption of Maastricht criteria fulfillment in 2007, the earliest
possible date to adopt the common currency was determined by 1 January 2009
Natuonal Euro Changeover Plan in SR
Chief negotiators: Minister of Finance and NBS Governor
Not to disrup the Emu stability, Slovakia had to meet four convergence criterias -
(maastricht criterias) + precondition advocasy of their long-term performance
Slovakia enterred the ERM II in November 2005
3 June 2008 finance ministers of eu member states at the Eu council meeting in
luxembourg recommended slovakia’s entry into emy by the first january 2009
20 jun 2008 eu council decided on sr’s membership in the emu

Principles of euro implementation in slovakia

The big bang - the euro is to be implemented simultaneously in cash and non cash
circulation on 1 january 2009, the euro is the only legal currency. From that date,
slovak euro coins are also valid in all eurozone countries
Short dual circulation - for 2 weeks we will still be able to pay with Slovak banknotes
and coins and Euro banknotes and coins - spending are made only in Euros.
The conversion rate - the conversion rate shall be used exclusively, st at 1
eur=30,1260 skk and determined as coefficient with 6 digits
Contracts continuity - all contracts remained in force, and from 1 january 2009
amounts payable in crowns are paid in euro, converted at the conversion rate
Rounding rules
Do not harm the citizens

The economic consequences of adopting the single currency in slovakia

Advantages of the euro:
Reduce of transaction costs and risks in the payment system
Elimination of exchange rate risk
Pressure to implement fiscal policy in line with the stability and growth pact
Price transparency increase
Financial markets stability and monetary stability
Increase of competitiveness
Common currency highlights the single market benefits
Disadvantages:
Monetary sovereignty loss
Possible not being able to react to a single monetary policy in terms of specific needs
for individual economies
 The possibility for price level

Nominal convergence
The maastricht criteria
Budgetary criteria
The ratio of government deficit must not exceed 3% of GDP
The rario of government debt to GDP (public / internal debt) shall not exceed
60%
Monetary criteria
Inflation - the average inflation for the past 12 months may not exceed the
average of the three EU countries with the best performance in terms of
inflation - by more than 1.5%
The stability of long-term interest rates - may be no more than 2% points
higher than the average of the three countries with the lowest rates

The debt crisis and EMU

The european financial stability fund (EFSF)
Without any support of European legislation, unmodified by any interstate agreement
Intentionally set company under luxembourg law, whose owners are the EMU
members
Fiscal part
“Gold” budget rule
Union bank

European stability mechanism - ESM bailout 2

700 billion euro of total capital
How it works:
80 billion euro - 620 billion euro