Policy Debate: Will the European Monetary Union succeed?

The introduction of the euro... has clear economic advantages. It removes the uncertainty over exchange rates from a large part of Europe.... It increases the transparency of the European market, which makes it easier to benefit from economies of scale, but - or rather, in addition - it encourages competition. The European System of Central Banks will also try to bring about price stability over a large area which, if successful, will be an important condition for a sustainable, real (i.e., actual) growth in income and employment. The economic advantages of EMU [European Monetary Union] increase in proportion to the size and stability of the euro region.
~ Willem F. Duisenberg

The ultimate irony, of course, is that the attempt to bind the European countries together in an artificial currency straight-jacket without political unity and common political will is bound to result in the exact opposite of what its founders intended: It will lead to a situation where individual national leaders will blame their economic and financial problems on the monetary straight-jacket forced upon them. One can well envision a situation in which Spanish leaders will claim that unemployment is so high because the European Central Bank's monetary policy is too tight, while at the same time Germany's leaders will blame the central bank for too high an inflation rate. This is not a recipe for monetary, economic and political harmony.
~ Robert Heller, "World View: Europe to Go?"

Most of the countries in Europe are participating in a bold economic experiment in which national currencies were replaced by a common currency (called the Euro) by 2002. In May 1998, decisions were made on which countries were eligible for participation in the European Monetary Union. A European Central Bank was created in 1998 that is charged with coordinating monetary policy for the EU. Since January 1, 1999, the Euro has been used for all foreign exchange operations in the participating countries. Euro banknotes and coins began to circulate on January 1, 2002 and completely replaced national currencies by July 1, 2002 (existing national currencies ceased to be legal tender in the participating countries on or before this date).

Supporters of the European Monetary Union argue that the introduction of a common currency will reduce transaction costs and increase the volume of trade among the participating countries. This results in larger gains from trade and increases the extent of competition in most product markets. Tourists will also benefit from the lower transaction costs associated with a single currency.

The introduction of a single European currency, however, also means that the participation countries will no longer be able to pursue independent monetary and fiscal policies. Monetary policy for the EU will be under the control of the European Central Bank. One of the major concerns about the success of the monetary union is whether this central bank will be able to maintain an independent policy of maintaining a low inflation target. While each country has some control over its own fiscal policy, the ability to engage in deficit spending is limited since the monetary union shares a common interest rate. Higher levels of government borrowing in one country raise interest rates in all participating countries. Countries that maintain deficits that exceed a specified value will be subject to sanctions. This may require countries to engage in procyclical fiscal policies during a recession (i.e., increasing taxes and/or reducing government spending or transfer payments to reduce a deficit).

One of the shortcomings of the European Monetary Union is that three members of the European Union (Britain, Denmark, and Sweden) have chosen to not participate in the European Monetary Union.

One of the major issues facing the European Union is the process of "Enlargement." As of 4/10/03, 13 additional countries (10 former Soviet bloc economies and Malta, Cyprus, and Turkey) have applied for membership in the EU. Most are working on a goal for joining in time for the 2004 elections for the European Parliament. If all of these countries participate in the EMU, the area and population covered by the euro will expand substantially.

• European Union
  http://www.europa.eu.int/index_en.htm
  The home page of the European Union (EU) contains press releases, links to institutions and agencies of the EU, and information about current and future activities of the EU.

• European Union, "Enlargement"
  http://europa.eu.int/comm/enlargement/index_en.html
  The Enlargement website provided by the EU provides detailed information of the Enlargement process. This site provides information on the status of negotiations with each candidate country on each of the requirements that must be satisfied for EU membership.

• Euro Archive
  http://europa.eu.int/euro/html/home5.html?lang=5
  The European Union's Euro Archive page contains detailed information about the process of introducing a common currency. This site contains a calendar listing critical dates in the process, a description of the currency, press releases, speeches, and other information that described the conversion process.

• Euro Essentials
  http://europa.eu.int/comm/economy_finance/euro_en.htm
  The European Union's Euro page contains a description of the currency, information on currency conversion, and a list of participating member states.

• European Central Bank
  http://www.ecb.int
  The European Central Bank's web site contains working papers, statistics, press releases, speeches, and other information dealing with the operation of the European Monetary Union.

• The Euro: Europe's New Currency
  http://pacific.commerce.ubc.ca/xr/euro/euro.html
  This page, provided by the Pacific Exchange Rate Service and maintained by Werner Antweiler, contains a large amount of information on the process of converting to a single European currency. An extensive list of links to relevant resources is also provided on this page.

• Thomas Smailus, "The EURO"
  http://www.rsip.lsu.edu/tom/euro/
  This page, provided by Thomas Smailus, contains information on the specific coins and paper currency that will be used in the EMU. He also provides summary information on the state of the participating economies at the time at which they were considered for participation.

• Crosswater Systems, "EuroPortal"
  http://www.crosswater-systems.com/em0000.htm
  This site, provided by Crosswater Systems, contains an extensive collection of links to information about the Euro and the EMU. Information is sorted by both the publisher of the information and by the topic covered at each site.

• Nouriel Roubini, "Homepage on European Monetary Union and the Euro"
  http://www.stern.nyu.edu/~nroubini/Emu/Emu.htm
  This web site, created and maintained by Nouriel Roubini, contains an extensive collection of links to online articles and other resources dealing with the European Monetary Union and the Euro.

• Euro Conversion FAQ
  http://www.sysmod.com/eurofaq.htm
  This Euro Conversion FAQ (frequently asked questions), provided by Patrick O'Beirne, contains substantial information on the European Monetary Union. An extensive collection of links to relevant web sites is also provided at this site.

• BBC News, "The Euro"
  http://news.bbc.co.uk/hi/english/events/the_launch_of_emu/euro_home/default.stm
  The This site, provided by the BBC, contains links to articles and information concerning the introduction of the Euro. Of particular interest is the material on the UK and the EMU.

• Northern Light, "European Economic and Monetary Union"
  http://special.northernlight.com/euro/
  This archived Northern Light special edition web site contains information about the European Monetary Union and provides links to related online resources.

• Treaty on European Union
  http://europa.eu.int/en/record/mt/top.html
  This site contains the full text of the Maastricht Treaty forming the European Union.

• Deutsche Bank Research, "EMU"
  https://www.dbresearch.com
  Deutsche Bank, Germany's central bank, provides this page containing links to numerous studies concerning the process of formation of the European Monetary Union. (The Adobe acrobat viewer plugin is required to view these studies. You may download this viewer by clicking here.)

• Europe 2020
  http://www.europe2020.org/en/index.htm
  Europe 2020 is a think-tank devoted to a discussion of the possibilities for the European Union. This site contains articles and information on issues currently facing the EU.

• Willem F. Duisenberg, Transcript of January 7, 1999 Press Conference
  http://www.ecb.int/key/st990107.htm
  Willem F. Duisenberg, the first President of the European Central Bank, discusses the introduction of the euro in this January 7, 1999 press conference. In his discussion, Duisenberg also discusses the policy plans of the European Central Bank. A question and answer session follows his presentation.

• Captain Euro
  http://www.captaineuro.com/
  Captain Euro is a comic book character created to help provide information about the euro. This site contains multimedia comic strip episodes, links to sources of information about the Euro, and an online currency convertor. To use all of the features of this site, you must have the free Shockwave plugin installed in your browser.

• Willem F. Duisenberg, "The Euro and the Process of European Integration"
  http://www.ecb.int/emi/key/sp980305.htm
  Willem F. Duisenberg was the President of the European Monetary Institute and is now serving as the first President of the European Central Bank. In this March 5, 1998 speech, he discusses the monetary union's role in the process of European economic integration. Duisenberg argues that there are significant political and economic advantages resulting from this process. He also discusses the role that must be played by the European Central Bank in maintaining a low and stable inflation rate.

• Willem F. Duisenberg, "The future of banking supervision and the integration of financial markets"
  http://www.ecb.int/key/00/sp000522.htm
  In this May 22, 2000 speech, Willem F. Duisenberg addresses the problems associated with banking supervision in a situation in which this role is undertaken by banking authorities in each of the 11 countries that participate in the European Monetary Union. He suggests that there is a need for greater coordination in bank supervision policies and practices.

• Yves-Thibault de Silguy, "The Impact of the Creation of the Euro on Financial Markets and the International Monetary System"
  http://europa.eu.int/euro/html/page-dossier5.html?dossier=00080&lang=5&page=1&nav=5
  This speech by Yves-Thibault de Silguy suggests that the Euro will play an important role as an international reserve currency. He suggests that the Euro will help to create a multipolar international monetary system that may be more stable than the current international monetary system.

• Valéry Giscard d'Estaing, "Economic and Monetary Union: The Making of a New Currency"
  http://www.eurunion.org/news/speeches/1997/970410vg.htm
  In this April 10, 1997 speech, Valéry Giscard d'Estaing provides a history of the European Monetary Union and discusses the advantages of this system. As part of his discussion, he suggests that some of the Maastricht treaty convergence criteria should be relaxed to allow more countries to participate in the monetary union.

• Perry Urken, "German Politics and EMU Convergence"
  http://www.wws.princeton.edu/~jpia/July96/urken.html
  In this article, Perry Urken argues that the slow process of macroeconomic convergence required under the Maastricht Treaty was primarily the result of German domestic politics. Urken argues that a more rapid transition to a monetary union would have been a more efficient process and would have resulted in fewer adjustment costs in those economies experiencing higher inflation rates.

• Robert Solomon, "International Effects of the Euro"
  http://www.mac.doc.gov/euro/press7.htm
  In this January 1999 Brookings Institution Policy Brief, Robert Solomon discusses the likely effects of the introduction of the euro on international trade. He argues that the volume of trade among the participating countries is likely to increase with the introduction of a common currency. Solomon believes that the Euro will become an international reserve currency only gradually.