Is the European Monetary Union a Disaster? - Discuss

Abstract

This essay evaluates the development of the EMU; a system that only came into effect three years ago. Through the lack of recent literature most of the evidence are derived from articles of various sources.

The essay takes into consideration that the EMU is embedded in a generally declining world economy. It illustrates why the EMU did not reach their targeted goals immediately and points out shortcomings in the architecture of the EMU in the Maastricht Treaty that ought to be reformed. It takes the viewpoint that although since the introduction of the Euro there is an apparent recession in the Euro area countries, it is not entirely to be blamed on new currency and that the allegation that the EMU is a disaster is totally unfounded.

For over thirty years now a European Monetary Union has belonged to the articulated aims of the European Union. All previous attempt to establish a Monetary Union, such as the so-called "Werner- Plans" in 1979 through the European Monetary System (EMS), failed though. In 2002 the EMU finally was put into full effect. Now that the Euro- countries have experienced three years with the Euro, it is possible to make a preliminary assessment of the Euro.

In order to detect whether 'EMU is a disaster' one has first to establish the meaning and context in which the term 'disaster' is used in relation to this question. The Oxford Dictionary defines the term 'disaster' as a 'complete failure' . In accordance to this definition one would expect the European Monetary Union to have an utter negative impact on the Euro countries, this could include a weak currency and business activity, a high inflation rate, a refusal of acceptance of the new currency from the citizens and a counter effect on the aim towards deeper European integration. In order to fulfil the aims of this essay, it will try to analyse the impact of the introduction of the Euro with the following criteria: first, it will outline the intentions for the introduction of the Euro and the advantages economist and member states had hoped to gain from it. Next, the essay will look at the reaction the Euro has caused in the economic and business cycles of the euro-area states and assess the capability of the European Central Bank (ECB) to deal with economic fluctuation. The next step will be to analyse the reaction of the public to their new currency and the practical implications the transformation caused. The last criterion is the political impact on European Integration and Deepening.

The Treaties of Rome which established the European Economic Community in 1957 announced that a Single European Market was the aim of the development which would accelerate prosperity and contribute to a closer union of the European nations. The Single European Act (1986) which launched the European Single Market programme and the Treaty of the European Union is based on this foundation. The treaties lead to the Economic and Monetary Union and are the cornerstones for the coherent currency. The third step towards the EMU began at the 1st January 1999, when the conversion rate was irresistibly locked in. From then on all the member states operated in a unitary monetary policy. The Euro was established as the legal means of payment and at first the eleven national currencies were reduced to subunits of the Euro. Greece joined the Euro system on 1st January 2001 and finally the European paper money and coinage were introduced to the 12 member states of the European Union on 1st January 2002. The introduction of the Euro presents a milestone on the way towards a united Europe in which the people, the public services and the assets have freedom of movement. The member states hoped to gain from the Monetary Union two kind of chances: On one hand it is supposed to present the motor for further political integration in Europe and on the other hand - in addition to the Single Market - it was expected to launch higher economic growth and greater business activity. With those objectives the following advantages are hoped to be gained from the single currency: No distortion in production and investments through exchange rate fluctuations. With a common currency no transaction and information cost are applicable of which the result of this is that more goods can be traded. In a Monetary Union the capital market gains on scope and liquidity. Therefore real interest rates are allowed to be lower than in the weighted average of the national currency areas. Through the common currency, the price- and market transparency will increase, which results in a more intensive competition in the commodity and financial markets. In addition the impact on the Euro in such a system should lead to higher extent of stability of the world currency system. This should result in stronger impulses for the world trade through a closer competition between the US-Dollar as international transaction-, investment and reserve currency. But those advantages will not follow up the implementation of the EMU automatically. Prerequisite is a high level of conformity between the member states in areas such as the creation of the regulated political frame, in the aims in the economic policy and in the control of the economic procedures.

Having outlined the advantages which should in theory be gained from the EMU it is now important to outline the risks of the EMU . Professor Wilhelm Hankel's book: 'The Euro- Illusion - can Europe still be saved' argues that the EMU will cause the EU's greatest setback in history . The EU will not reach the political Union nor does it make an effort to acquire social union: the regional opposition of poor and rich will deepen. The Monetary Union does not emerge simultaneously with a political Union. There are no common economic, financial or social policies. Therefore the economic differences between the member states will prevail. The disequilibria cannot longer be balanced out through exchange rate changes. This could result in blanket transfer mechanisms and the European Central Bank would fall under pressure.

In order to assess the economic impact of the EMU, we must take in consideration that the EU is part of the World Economy. Therefore the question arises what would be of advantage for the EU economy: a strong Euro would cheapen the EU's imports, for instance cheaper imports of resources would enhance production where as a weak currency would lower prices of the European export and make European goods more competitive.

The primary objective of the EMU is to maintain price stability. The Governing Council of the ECB has defined price stability as a year-on-year increase in the Harmonised Index