Intro • The economic union in Europe is a currency union of the 16 EU members who have adopted the Euro as their sole legal tender • All of the Euro zone is united under the European Central Bank • Their goal is to maintain monetary stability while promoting economic growth and integration among the member states. • First steps towards an economic union started with the Treaty of Rome • Which reduced the restrictions on trade in Europe • The first proposal for a economic and monetary union was made by the European Commission with the Marjolin Memorandum
The European Central Bank • Established in 1998 by the Treaty of Amsterdam • Is Headquartered in Frankfurt, Germany • Exceeded the European Monetary Institute • The ECB tries to maintain price stability in the euro area through their monetary policy • The ECB has the power to….. • conduct foreign exchange operations • authorize and issue euro banknotes
ECB continued… • To control money supply the ECB adjusts interest rates. • In attempt to prevent future inflation the bank monitors current price trends by interpreting as to whether or not they are deemed as a potential risk to the fiscal stability of the euro area • To fulfill its duties the ECB has to collaborate with the European System of Central Banks (ESCB) • Monitors markets so that consumers prices don’t deviate more than 2% • In order to avoid such inflation the ECB can manipulate the money supply so that the amount of money in circulation is in accordance with the volume of consumer goods
ECB continued • The ECB is structured in a manner in which there are three governing bodies of decreasing power and influence • The executive board carries out the daily activities of the ECB by giving instructions to the national central banks of the union members and by enacting the necessary monetary policy of the time which is defined by the Governing Council • The governing council serves to define the monetary policy that is to be enacted by the Executive Board and to set the interest rates that allows commercial banks to borrow money from the ECB
ECB continued • The General Council merely acts as a consultative branch to the ECB as they help plan the future expansion of the euro zone. They deal with the transitional phase of helping EU member states to adopt the euro currency as their old currency falls out of circulation
The Formation of the Economic Union • The economic and monetary union (EMU) was created in a three part process including the coordination of economic policy, converging economic cycles, and lastly adopting the Euro.
Stages of Economic Union • First Stage • Coordinated and joined the economic policies in participating countries. • Eliminated trade restrictions as there was an end to exchange controls which would allow for free movement of capital in the EU • There would be more funding provided towards decreasing inequalities between various European regions through the use of Structural Funds that would aid struggling states • The economic policies of member states would be monitored so that they would be in accord with the guidelines set out for entry to the union.
Stages of Economic Union • Second Stage • Was a preparation stage, preparing for stage three which would be the ultimate adoption of the euro • It included fiscal convergence as to ensure that economic cycles of member states would be in sync with one another • The first part of this plan included the creation of the ECB in Frankfurt which would be made up of the governors of the central banks of member nations • Rules were be implemented to ensure the regulation of national budget deficits • Elections of presidents and vice presidents for the ECB were held
Stages of Economic Union • Third stage • The euro was adopted as the currency of the euro zone • ECB took on the responsibility of conducting all monetary policy • Euro is distributed • Within two months all national currencies were successfully taken out of circulation • The Euro now serves as the legal tender for all cash and bank transactions in the member states
Criteria for Joining the Euro zone/EMU (Maastricht Criteria). 1. Deficits: National government deficits must be less than 3% of GDP2. Public Debt: Government debts must be less than 60% of GDP3. Interest/Price Stability: Long-term interest rates on debt must be within 2% of average in the top 3 EU member countries with best inflation record4. Inflation: Annual inflation rate cannot exceed average of top 3 performing EU countries by more than 1.5% during year prior to Euro zone assessment.5. Exchange Rate: Must remain within normal fluctuation margins (15% around fixed parity with the euro) for the last 2 years before assessment.-Stability and Growth Pact - Can create penalties for over deficit-Must be part of European Exchange Rate Mechanism (ERM) for 2 years prior to becoming member of Euro zone. Countries manage own exchange rates until excepted into Euro zone.
Requirements to be in the Euro zone • To join the Euro zone a country must • Prove price stability by having an inflation rate that isn't more than 1.5% from the average of the three countries with the lowest inflation rate • Interest rates may not deviate more than 2% from the average of the three countries with the lowest rates • The national deficit must be smaller than 3% of the gross domestic product • Public dept can not exceed 60% of the gross domestic product • Have exchange rates that demonstrate stability so that rates would have stayed within the allowed margin of fluctuation over the past two years • a state must be part of European Exchange Rate Mechanism (ERM) for 2 years.
Survival and Expansion • The Stability and Growth Pact that was signed in 1997 created a committee that was devoted to the task of budgetary stability • They had the authority to place penalties on any country whose budget deficit exceeded 3% of their GDP • The Eurogroup was created to ensure proper coordination of economic policies among the member states • It is a compilation of the finance ministers from the member states who meet and discuss the financial policies of the euro area countries and also represent the euro in international monetary meetings
Exchange rates 1 euro equals… • = 40.3399 Belgian francs • = 1.95583 Deutsche Mark • = 340.750 Greek drachmas • = 166.386 Spanish pesetas • = 6.55957 French francs • = 0.787564 Irish pounds • = 1,936.27 Italian lire • = 40.3399 Luxembourg francs • = 2.20371 Dutch guilders • = 13.7603 Austrian schillings • = 200.482 Portuguese escudos • = 5.94573 Finnish markkas