The European monetary union is an area within the European Union whereby people, services, goods and capital move freely without facing any restrictions. The imperative to the success of European Monetary Union is employment of use of single European currency the Euro. It also involves the application of certain macro economic policies by the members of the European monetary union. It is the intent of the European governments to establish a framework or structure for stability, prosperity and peace. This is done through the promotion of structural change and development in the region.
The research paper highlights the fundamental gains accrued by the European business community because of European monetary union policy provisions. The paper will also examine the developments and the circumstances that lead to the formation of European monetary union. This will help to give insight into the functioning of the monetary union. The paper will also give analysis on the implications the European monetary union has for firms in the union and those firms that are in other European nations (Scobie, 1998).
The originality of the European monetary union can be traced to the formation of the European coal and steel community in the 1950’s. The formation of this union was the first attempt to enhance European economic unity. This was aimed at the achievement of greater international competitiveness. As a result of the success that this venture had, thee six foreign ministers of six nations that were presented in the union examined the possibility of forming a further economic integration. In 1957, the treaty of Rome, which is one of the most significant agreements in European economy, was signed.
The treaty was aimed at the provision for the establishment of a common market. The most significant aspect of the Rome treaty was the commitment that was shown by countries such as Belgium, France, Netherlands, Italy and West Germany to facilitate free movement of goods and other factors of production. The European governments aimed to eliminate internal trade barriers and establish common external tariffs and harmonize the member states laws and regulations. (Scobie, 1998). The movements towards the creation of a common European market continued progressing with success until the late years in the 1960’s.
It is during this time when the Bretton-Woods Exchange Rate Regime started showing some unmistakable flaws. There was also global inflation which was alarming high. Furthermore, there was a revaluation of the German Deutschemark and the devaluation of the French Franc, which created considerable exchange value volatility in Europe. This lead to many members states to have the belief that the ability of Europe to be in a position to compete within the global economy was based on the introduction of single currency (Welfens, 2001).
In the 1970, the Werner Committee was created to found out a way to resolve the most efficient means of converging economic currencies and performance. The committee came up with proposition of a three stage process of establishing a complete monetary union within ten years. The final aim was to have free movement of capital, a permanent lock of exchange rates and the replacement of all notes and coins into a single currency. The committee proposed there to be a complete European Monetary Union in 1980.
However, the plans by the Werner committee were abandoned because of infamous oil Price Shocks in the 1970’s and the introduction of a floating exchange rate regime. However, the endeavors of the European monetary union were bold putting the consideration the erratic economic climate that existed in the 1970’s. However, despite this economic situation the European Community members continued with their pursuance of the concept of European Unity (Scobie, 1998). It was in 1979 when the European monetary system was established.
This was aimed at fostering a greater stability between members states currencies and to create stronger coordination of economic policies. He European monetary state included four main components. There was the European Currency Unit, The exchange Rate mechanism, European monetary cooperation fund and the Financial Support Mechanism. The heart of European Monetary System was the Exchange rate mechanism. It provided exchange rates in fixed but adjustable rates between countries. This is where the currencies could move within certain margins or fluctuations.
If in any case the limits were breached the responsible authorities were supposed to impose the appropriate policy measures. During the 1980’s the European monetary system experienced considerable success. The European monetary system was able to lower inflation rates in the European community and eases the adverse financial effects of the fluctuation of the global exchange rates. The main problem, which was faced by the European Monetary System, was that it lacked true sovereignty over the member states. The member states continued to have their autonomy over macro economic policies and over currencies (Farina & Tamborini, 2007).
In 1987 the single European Act was passed. The act contained a comprehensive program of measures, which were supposed to be implemented inorder to achieve a single market, and the timetable, which was supposed to be adhered to success of the action. The single European Act aimed to create a single market in place by 1993. The acts proposed the removal of all the frontiers controls between European community countries, application of a mutual recognition principle to open public procurement to suppliers who were non-nationals and to product standards.
The act also provided the lifting of barriers in the European community retail banking and insurance industry. It proposed elimination of restrictions on the transactions of foreign exchange. The substantial surrender to by member states of their economic autonomy to the European System to the European System of Central Banks acted was pivotal to the Single European Act. The European System of Central Banks was supposed to take the responsibility for the coordination of macro economic policies in particular monetary policies. It was its primary role to fix internal exchange rates to the single currency i.
e. the Euro, have a control to the foreign reserves and interest and inflation rates (Welfens, 2001). The real realization of a single currency was hindered by the failure of Delors report to create economic standards, which were supposed to be achieved by the member states in order to ensure convergence into one business cycle. In 1993, the treaty of Maastricht created a timetable for the implementation of the single currency and the convergence that that was supposed to be reached by the nations that would be members of the European Monetary Union.
The convergence criterion of Maastricht is an essential component of the European Monetary Union. (Farina & Tamborini, 2007). In order to be a member of the European Monetary Union there are five minimum requirements that a state is supposed to meet. One an ascending country must have inflation no higher than 1. 5 percent above the average for the three European Union members, which have the lowest rates during the past year. This means that there should exist price stability within a country economy.
A state should also experience long-term interest rates, which is not higher than 2 percent above three European Union members, which have the lowest rates during the past year. The exchange rate of a country economy is also supposed to be in the normal band of 2. 25 percent for two years without devaluation. Those countries, which consider imminent memebership shoul, also have a fiscal prudence or the economy of a country should not show have a deficit in its budget, which is above 3 percent of its growth domestic production.
It is also essential that a country, which aspires to join the European monetary union, should have a national debt that does not go above 60 percent of growth domestic production (Grahl, 2001). These strict economic standards, which are supposed to be met by states before they can be allowed to Join European monetary union, ensure that all the countries could be brought to the same position in cycle of business. If all the member countries have the same experience in economic conditions it is possible for the European System of Central Banks to prescribe uniform discretionally fiscal policy and uniform monetary policy.
(Farina & Tamborini, 2007). The other agreement, which is of great consequence to the development of the European monetary union, is the creation of the Stability and Growth Pact. This is an arrangement, which was initiated in 1996 at the Dublin Summit of the European Council, which creates rules related to currency and discipline for countries within countries, which use Euro. This policy holds that all members of the European Monetary Union must adhere to the Maastricht Criteria and gives the definition of possible enforcement mechanisms, which are applied.
In its specifics, the stability and growth pact gives the conditions under which European monetary union members have the right to have an extension on the set public debt to Growth Domestic Production ratio. If the authorizations to exceed the public debt is not granted the member states makes a mandatory deposit, which is transformable into a fine in two years later (Scobie, 1998). The development of the European monetary union has been a long and a very involving process spanning for fifty years. European monetary union yields a lot of benefits to for businesses and firms with the Euroland.
It also has a lot of implications for the business communities in other countries in Europe. The European monetary union facilitates the movement of people, services, goods and capital by the development of a single European currency and by the removal of barriers to intra community trade. Businesses and firms in Europe are given the chance to make use and exploit the liberalization of controls across borders, which in the past had hindered their ability to trade within Europe. (Grahl, 2001). It is now possible for European firms to have access the twelve Euro zones markets.
This creates an opportunity to introduce new and modified good and services for each member states. It also offers an alternative in the provision of standardized set of goods and services for those countries that use Euro. The development of the European monetary Union facilitates those companies who seek to have competitive advantage of factors of production, which are inherent in some of the member nations. The enhanced movement of capital and labour makes the firms be able to establish different aspect of their business operations throughout the states where the Euro is used.
The commitment which the European monetary authority have in lowering the cost of transport specifically the abolition of the restrictions on cabotage and also allows the businesses to develop more channels that are efficient in distribution of goods and services in the whole of Europe. (Farina & Tamborini, 2007). The financial markets have also undergone a considerable liberalization through the process of European monetary evolution. This has resulted in the removals of the barriers and restriction, which used to limit cross border borrowing.
The commitment in the reduction of financial barriers also ensures that firms from members states have access to inexpensive finance from all the European monetary Union states. (Farina & Tamborini, 2007). The culmination of greater product choice also increases movement of factors of production and leads to enhanced channels of distribution. This culmination pf greater product choice also guarantees firms in the Euro zones to operate in a highly dynamic and ever expanding market.
This stimulates the European monetary union to become a very competitive economic community. For instance, currently intra community trade accounts sixty percent of member states international exchanges. This is a figure, which is likely to grow as European Monetary Union continues to experience success. (Welfens & Europaisches Institut fur Internationale Wirtschaftsbeziehungen, 1997). The development of the European Monetary and the removal of exchange rates, administrative and trade barriers encourage the firms to seek strategies to form join ventures and alliances.
The union makes these firms facilitate the sharing of research and development, sharing of intellectual property, labour and capital techniques and contribute to improved competitiveness of the firms both within the Euro zones and in the international markets (Welfens, 2001). The political and economic integration among the states of the European monetary union is necessary to enhance competition of European firms with other multinational companies from United States of America and Japan.
It has been argued that the key to offer challenge to the economic strength firms from Japan and United States of America is by realization of strong domestic competition. The domestic competition is created by removal of the barriers between Euroland countries. This leads to intensification of domestic competition, which leads to the development of firms that are capable of competing successfully in the international trade (Grahl, 2001). The full integration of Euro into the European monetary union as the medium of exchange also eliminates the risk, which is found in foreign exchange in international trade.
Those firms, which operate within the Euro land, do not have to factor the foreign exchange fluctuations into their profit margins. This provides more incentive for market entry of the large firms, which gives the small, and the medium sized firm the encouragement to initiate a more global strategy. The European System of Central Banks prediction of the interest rates within some European monetary union member countries to fall to low levels. This creates an environment that is conducive for growth and expansion within the economy.
This growth is stimulated by high borrowing and by the positive business sentiments. (Welfens & Europaisches Institut fur Internationale Wirtschaftsbeziehungen, 1997). The development of European Monetary Union has also some negative effects for Euroland. The European businesses have to bear with the financial costs, which are involved in making their operations ready to use the Euro. This is because in order for the firms to be able to operate efficiently they have to convert their equipments and software.
There is also the need for labour training and there is need for new procedures in order to be able to deal with Euro and be able to carry out transaction with other firms that use Euro (Grahl, 2001). The nations financial industries have also to take greatest burden as foreign exchange m equalities and managed fund transactions need to be carried in Euros. There are also considerable implications for contract laws because of the rise of European monetary union. (Welfens, 2001). Implementations of contracts have become a little bit difficult with the introduction of new currency in member states.
However, the greatest loss to the European monetary union member states is the loss of their national autonomy and the loss of the ability to, make their own choices of the fiscal and monetary policy. The other loss is to the political leaders in the countries because they a no longer rely on monetary and fiscal policies platforms as a way of being elected. This is because they are constrained by the European Monetary Union economic guidelines. Fiscal policies can also not be employed as a direct targeting within the countries, which use Euro, this may lead to member countries to start exhibiting symptoms of political and economic disarray.
The business community in the Euro zone may also experience excessive scrutiny of their business practices because of the European Monetary Union evolution. This increased scrutiny is intended to protect the consumer within Europe, however this would lead to increased cost in the transaction of the business by the communities (Welfens & Europaisches Institut fur Internationale Wirtschaftsbeziehungen, 1997). References Farina, F. & Tamborini, R. (2007) Macroeconomic policy in the European Monetary Union: from the old to the new stability and growth pact, New York, Routledge.
Grahl, J. 2001) European monetary union: problems of legitimacy, development and stability, New York, Kogan Page. Scobie, H. (1998) European Monetary Union, New York, Routledge. Welfens, P. & Europaisches Institut fur Internationale Wirtschaftsbeziehungen. (1997). European monetary union: transition, international impact, and policy options : with 50 figures and 31 tables, Berlin, Springer. Welfens, P. (2001) European Monetary Union and exchange rate dynamics: new approaches and application to the Euro, Berlin, Springer.