EUROPEAN
MONETARY
UNION
Jérôme ODDO
Céline VERCHERE
Introduction
The EMU: 3 stages coordinating economic
policy and culminating with the adoption of
the Euro
 15 member states have adopted the Euro
 To adopt the Euro:

 Copenhagen
criteria
 To have its currency in the ERM II for 2 years
The creation of the EMU

Stage 1: 1 July 1990 to 31 December 1993

Stage 2: 1 January 1994 to 31 December 1998

Stage 3: 1 January 1999 and continuing
Why a Monetary Union?
A single market with a common currency
 The Delors Report :

 The
EMU is a natural consequence of the Single Act
 Exchange
rate volatility is harmful to trade integration
 A tightly pegged exchange rate cannot impose
sufficient discipline on monetary policy
 National currencies cannot and should not be
preserved
Is the EMU an Optimum Currency
Area (OCA)?





A geographical region in which it would
maximize economic efficiency to have the entire
region share a single currency
Labour mobility across the region
Product diversification
Openness with capital mobility and price and
wage flexibility across the region
An automatic fiscal transfer mechanism to
redistribute money to areas which have been
adversely affected by the first two characteristics
Numerous debates
The “monetarist” view : the Maastricht
criteria were the source of a painful growth
slowdown
 The “economist” view: costs were
pedagogically useful to acquire a culture of
price stability
 The verdict on convergence remains
controversial

The Stability & Growth Pact

The Stability & Growth Pact is a mattering tool which the
countries of the euro area acquired to coordinate their
budgeting policy extreme.
SGP includes two types of dispositions:
- Multilateral surveillance, precautionary disposition
- The procedure of deficit extreme.


Policy Coordination
Why?



The main reason for adopting the SGP is for correcting
deficit bias.
The euro offers a chance of dealing with the deficit bias
through externally imposed rules is open to discussion.
Euro area is a pretext to deal with correctly diagnosed
problem raises good questions.
The deficit is source of numerous problem, two valid
reasons to limit deficits are the link between debts
financing and inflation.
Reform



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Reforming the SGP has become a highly debated issue
in Europe.
The reform starts with recalling the fiscal policy
framework in the euro area: the 3 % of GDP limit for
public deficits,
Stability programmes,
The broad economic policy guidelines.
The weaknesses of the existing procedures are
addressed: the arbitrary nature of the criteria, the lack of
economic policy co-ordination.
The Euro System

The Eurosystem which comprises the European
central Bank and the national central banks of
the member states whose currency is the euro is
the monetary authority of the euro area.
Eurosystem have as for primary objective the
maintenance of price stability for the common
good. Acting also as a leading financial
authority, Eurosystem aim to safeguard financial
stability and promote financial integration.
The Monetary Policy


Monetary policy is the process by which the
government, central bank, or monetary authority
manages the supply of money, or trading in
foreign exchange markets. The monetary policy
was assigned by the Maastricht treaty.
The monetary policy has two pillars: the first is
the monetary pillar defined as a prominent role
for money, and the second include indicators to
deliver a broadly-based assessment of others
forces affecting inflation.
The stability & inflation target

The EMI defined price stability as “a year
on year increase in the Harmonised Index
of Consumer Prices (HICP) for the Euro
area of below 2%”

To avoid deflation it is added an implicit
target range of 0-2%
Transparency & Accountancy
Financial markets consider that
Eurosystem has established its credibility
 Central banking effectiveness depends on
the ability of outsiders to read and
anticipate central bank actions
 Transparency is a condition for
effectiveness

Conclusion

Today the Euro Area is not in a good
situation, the economic logic has not
always respected. Policies are focalized
on the process of choosing the founding
members of euro area. The time is now at
the extension. The monetary strategy of
the eurosystem has also been readjusted
but has not seriously applicated.