European Monetary Union
- 1. Presentation on : EUROPEAN MONETORY UNION
- 3. Preview • HISTORY • THE ORIGIN OF EU • WHAT IS EU? • WHAT IS EMS? • MEMBERS OF EMU • FUNCTIONS OF EMS • WHY THE EMU? • WHY THE EURO?
- 7. What Is the EU? • The European Union is a system of international institutions, the first of which originated in 1957, which now represents 28 European countries through the: European Parliament: elected by citizens of member countries Council of the European Union: appointed by governments of the member countries European Commission: executive body Court of Justice: interprets EU law European Central Bank, which conducts monetary policy, through a system of member country banks called the European System of Central Banks
- 8. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 20-8 What Is the EMS? • The European Monetary System was originally a system of fixed exchange rates implemented in 1979 through an exchange rate mechanism (ERM). • The EMS has since developed into an economic and monetary union (EMU), a more extensive system of coordinated economic and monetary policies.
- 9. EU/EMS Members of the Economic and Monetary Union (EMU) Countries in red: EU members that use the euro and are members of the EMU. Countries in blue: EU members that do not use the euro and are not members of the EMU.
- 10. Member Countries • Austria • Belgium • Bulgaria • Croatia • Republic of Cyprus • Czech Republic • Denmark • Estonia • Finland • France • Germany • Greece • Hungary • Ireland • Italy • Latvia • Lithuania • Luxembourg • Malta • Netherlands • Poland • Portugal • Romania • Slovakia • Slovenia • Spain • Sweden • United Kingdom
- 11. Functions of EU/EMS? • Countries that established the EU and EMS had several goals 1. To enhance Europe’s power in international affairs: as a union of countries, the EU could represent more economic and political power in the world. 2. To make Europe a unified market: a large market with free trade, free flows of financial capital and free migration of people—in addition to fixed exchange rates or a common currency—were believed to foster economic growth and economic well being. 3. To make Europe politically stable and peaceful.
- 12. Why the EMU/EU? Members formed the union for principally 4 reasons: • Unified market: the belief that greater market integration and economic growth would occur. • Political stability: the belief that a common currency would make political interests more uniform. • Belief that German influence under the EMS would be moderated under a European System of Central Banks. • Eliminate the possibility of devaluations /revaluations of currency: With the free flow of financial capital, capital flight and speculation could occur in an European Monetary System with separate currencies, but it would be more difficult with a single currency
- 13. WHY EURO? The euro means big changes for business both within these countries and throughout Europe: • Cheaper transaction costs – Countries in the euro zone do not have to change currencies when doing business with each other. • Exchange rate certainty – Sharing a single currency means countries in the euro zone are no longer affected by currency fluctuations when trading with each other. • Transparent price differences – It is more obvious if different euro zone countries charge different prices for the same goods and services.
- 14. CONCLUSION The EMS was first a system of fixed exchange rates but later developed into a more extensive coordination of economic and monetary policies: an economic and monetary union. The Single European Act of 1986 recommended that EU members remove barriers to trade, capital flows and immigration by the end of 1992. An optimum currency area has members that have a high degree of economic integration among goods & services, financial capital and labor markets. It is an area where the monetary efficiency gain of joining a fixed exchange rate system is at least as large as the economic stability loss.