The Economic and Monetary Union (EMU) is a single currency area within the European Union in which people, goods, services and capital move without restriction (Europa Quest (1), 2001). Imperative to the success of the EMU is the implementation of a single European currency, the Euro, and the application of specific macro-economic policies by the EMU member states (Harris, 1999: 78). Moreover, it is the foreseeable intent of European governments to create a framework for stability, peace and prosperity through the promotion of structural change and regional development (JP Morgan, 2001).
This essay will endeavor to highlight the fundamental gains likely to be accrued by the European business community as a result of EMU policy provisions. The developments and circumstances preceding the EMU formation will be examined to give insight into the functioning of a monetary union. Furthermore, it is essential to analyze the implications the EMU has for firms within both ‘Euroland’ and other European nations. To establish a strong understanding of the intricacies of the EMU, it is essential to discuss both the antecedents and major developments in this monetary union.
The origins of the EMU can be traced to the formation of the European Coal and Steel community (ECSC) in the early 1950s, which was the first attempt to harness European economic unity to achieve greater international competitiveness (Per Jacobson, 1999) (Duisenberg, 1998). The success of this venture prompted the foreign ministers of six ECSC nations to examine the possibility of further economic integration (Chulalongkorn University, 1999). Hence, in 1957 one the most significant agreements in European economics history, The Treaty of Rome, was signed.
The Treaty of Rome’s fundamental goal was to provide for the creation of a common market (Kenwood & Lougheed, 1999:280). The most significant aspect of this treaty was the commitment made by such countries as Belgium, France, West Germany, the Netherlands, Italy and Luxembourg to facilitate the free movement of goods, services and factors of production. Essentially, these European governments sought to eliminate internal trade barriers, create common external tariffs and harmonies member states laws and regulations (Hill, 2001: 233).
This movement towards a common European market continued with relative success until the late 1960s. During this period, the Bretton-Woods Exchange Rate Regime had begun to exhibit unmistakable flaws, whilst global inflation was alarming high. In addition, the revaluation of the German Deustchemark and the devaluation of the French Franc, created considerable exchange rate volatility within Europe (Barber, 1999). It was a common held belief amongst many member states, that Europe’s ability to compete within the global economy hinged on the introduction of a single currency (d’Estaing, 1997).
Hence, in 1970 the Werner Committee was established to resolve the most efficient means to converge economic performance and currencies (Harris, 1999:76). The Werner Report proposed a three-stage process for achieving a complete monetary union within a decade. The final goal would be the free movement of capital, the permanent locking of exchange rates and the eventual replacement of the EC6 nations notes and coins with a single currency (Barber, 1999).
The committee proposed a complete European Monetary Union by 1980, however the failure of the Smithsonian Agreement, the subsequent introduction of a floating exchange rate regime and the infamous Oil Price Shocks of the 70s, caused the plans outlined by the Werner Committee to be abandoned (Harris, 1999:79). In retrospect, the endeavors of the EMU were bold considering the erratic economic climate of the 1970s (Kenwood and Lougheed, 1999:310).
Yet, even in this period of economic uncertainty, EC member’s still persued the concept of European Unity (Princeton Economics, 1998). In 1979, the European Monetary System (EMS) was established to foster a greater stability between member state’s currencies and stronger coordination and convergence of economic policies (Europa Quest (1), 2001). The EMS consisted of four main components, the European Currency Unit (ECU), The Exchange Rate Mechanism (ERM), The Financial Support Mechanism (FSM) and the European Monetary Cooperation Fund (EMCF) (Harris, 1999: 80).
The ERM was at the ‘heart’ of the EMS and provided for “fixed but adjustable” exchange rates between countries, whereby currencies could move within certain margins or fluctuations. When limits were breached the responsible authorities were required to impose appropriate policy measures (Europa Quest (1), 2001). The EMS enjoyed considerable success during the 1980s, lowering inflation rates in the EC and easing the adverse financial effects of the global exchange rate fluctuations (Chulalongkorn University, 1999).
The most problematic aspect of the EMS was that it held no true sovereignty over member states, rather these countries still maintained autonomy over currencies and macro-economic policies (Harris, 1999; 80). To rectify this systems inadequacy, Jacques Delors, the President of the European Commission, issued the Cockfield Report, which sought to define the current status of the European markets and establish the correct means for implementing a monetary union (Chulalongkorn University, 1999).
