The Euro as a Common Currency Essay

Custom Student Mr. Teacher ENG 1001-04 14 January 2017

The Euro as a Common Currency

The Euro is nowadays the common and official currency of the participating countries in the Economic and Monetary Union (EMU), which are those sharing the same market, the same currency and a unique monetary policy. Concretely, 17 member states form the economic and Monetary Union today. These States are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The currency is also used by 5 other European countries without taking account of Kosovo, what leads to the fact that 327 million Europeans use this currency day after day.

The five countries are: Monaco, San Marino, Vatican, Andorra and Montenegro. For this reason the euro-zone is formed by all those Member States which have adopted the euro as their common currency, in addition to Monaco, San Marino, Vatican, Andorra and Montenegro and the outermost regions of some of the euro-zone countries, for instance Guadalupe, the French Guiana, Mayotte, Martinique, San Bartolome, San Martin, San Pedro y Miquelon y Reunion, which use the euro too. Within the European Union there are 27 countries. Ten of those countries are not part of the Economic and Monetary Union.

Those countries are: Bulgaria, Denmark, Hungary, Latvia, Lithuania, Poland, United Kingdom, Check Republic, Romania and Sweden. Those countries keep their own currency and monetary policy. History It can be said that the Euro emerged from the endeavour of Helmut kohl, as he was chancellor of Germany (1982-1998) to unify Europe regarding politics and currency, setting the European Union in 1993 with the Maastricht Treaty. During his 15 years of German Chancellorship he contributed determinedly to the European integration process.

His ambitious idea of a United Europe stayed in only a monetary union. The creation of the Economic and Monetary Union is an agreement between the nations constituting the European Union in order to share a unique currency, a common economic policy and certain fiscal responsibilities. With the completion of the Second World War the currencies of the world were located under the purview of the dollar. This power of the dollar and the depreciation of some European currencies caused the thought of an economic integration of the European nations in order to obtain a stronger common currency.

In 1969 the plans to create a common European currency started with the Barre Report. After the creation of the European Monetary System (EMS) and the Exchange Rate Mechanism (ERM) in 1979, with the aim of unifying the European currencies, thus eliminating the possible fluctuations between them, the European markets began to be more united, eventually constituting the Single European Market. The only problem emerging in a single market was the exchange risk and the transaction costs associated with it, for this reason the idea of a common currency began to be considered as a good solution for these problems.

With the removal of the institutional and economic barriers of the member countries and the establishment of the objective of a Single European Market, the plans for the creation of the Economic and Monetary Union begin, starting officially the 1st Stage in the creation of the (EMU). 1ST Stage The first stage begins with the deletion of the exchange rate in 1990, thus releasing the capital movement. In so doing, the economic policy is coordinated, especially with respect to price stability and the consolidation of the public finances, and the obstacles for the financial integration are abolished.

The 3 stages for the creation of the EMU according to the Jacque Delor’s Commission are formalized in 1992 with the Maastricht Treaty, in which the requirements to adopt a common currency are included. The requirements to be part of the European Union and adopt the euro as a common currency are laid down in three documents. The first of them is the Maastricht Treaty set up in 1993. The same year the European Council of Copenhagen was created, which clarified the general objectives regarding the Maastricht Treaty.

The last document contains each treaty negotiated with each acceding country to the European Union. This stage concludes in 1993 and it can be observed those countries which meet the established criteria in the Copenhagen Report and enter the European Union. This stage was characterized by the development of the single market, the free capital movement, the economic convergence and the creation of the EU under the Maastricht Treaty. 2nd Stage This second stage started in 1994 with the creation of the European Monetary Institute (EMI), which is the forerunner of the European Central Bank.

Another significant event in this stage is the fact that Germany successfully proposed the change of the name of “ecu” for euro, at the Madrid Summit (1995). In 1997 the Stability and Growth Pact was agreed, according to which the countries were demanded to keep the budget deficit and the public debt within set limits, and the exchange rate mechanism (ERM II ) was created, which replaced the European Monetary System and the ERM I after the launch of the euro. In 1998, 11 of the 15 Member States which satisfy the criteria to adopt the single currency were chosen by the European Council.

The countries are: Luxemburg, France, Belgium, the Netherlands, Finland, Germany, Italy, Spain, Portugal, Austria and Ireland. The European Central Bank (ECB) was created with a specific mandate to decide the monetary policy of the euro-zone. Its main goal was to guarantee the price stability and supervise the European System of the central banks. At the completion of the stage, in 1998, the 11 countries have recently joined the EMU and waiting for the adoption of the euro as a common currency. 3rd Stage

The third stage begins in 1999 with the launch of the euro, in the form of virtual currency, as official currency of all the member countries of the EMU and the exchange rates, between the currencies of these set countries. ERM is finally substituted by ERM II. The Eurosystem, composed by the ECB (European Central Bank) and the central Banks of the euro-zone member countries, assumed the management in the monetary policy, which starts to be the only one for these countries. From this moment on, the transitional period that lasted until the 1st January 2002, when the euro banknotes and the coins were launched.

Greece fulfils the criteria of Maastricht in 2001 and becomes the twelfth country to join the euro-zone. It is necessary to fulfil the convergent criteria put forward in Maastricht in 2002, in order to adopt the euro definitely. There are three countries which are not part of the EMU’s third stage: Sweden, United Kingdom and Denmark. Sweden didn’t fulfil the convergence criteria, the United Kingdom didn’t want to join to the EMU’s third stage, and Denmark refused the Maastricht Treaty although it has sought later to be a member of it.

It was the greatest exchange of currency of history and thus the most pessimists thought it wouldn’t succeed, but thanks to the cash machines, a great spreading of the euro was produced and in a few weeks the most part of the transactions were carried out with Euros. By the end of February of 2002, the national currencies disappeared giving way to the Euro. Subsequently, new countries join the euro-zone as for example, Slovenia in 2007, Malta and Cyprus in 2008, Slovakia in 2009 and Estonia in 2011.

Economic Policies The economic policies are a set of actions that a Government is able to carry out with the purpose to influence the economy of a country. Due to the introduction of the Euro as a common currency and a single monetary policy carried out by the ECB, the way in which the member country perform its economic policies is modified. Within this economic policy it is possible to talk about monetary policies, exchange policy, fiscal policy, market policies of working and employment, microeconomic and structural policies.

The Maastricht Treaty transfers the competitions of the monetary and Exchange policies to the Eurosystem with the ECB as a central institution, and the fiscal policies, the market policies of working and employment and the microeconomic and structural policies are left to the national authorities. Monetary Policies It deals with aspects related with the money emission, the interest rate and the inflation, among others. After the creation of the EMU, the monetary policy becomes single and executed by the European Central Bank, being common for all the participating countries.

The ECB is in charge of drawing up the monetary policy but, to bring it into operation it uses the Central National Banks. The aim of a single monetary policy is to keep the price stability, thus contributing to a better pursuit of the general objectives of the economic policies of the Community. The price stability is defined as year-on-year increase of the consumer price lower than 2%. In order to keep the price stability, the ECB attaches great importance to money since an excessive increment of the monetary offer causes an excess of money to acquire goods and services, causing high inflation.

The existing information about the future evolution of the prices is also the key for the pursuit of the ECB objectives, and for this a set of indicators as, for example, the wages, the long-term interest rates, the exchange rate, and others, are used. By means of an interest rate fixation in the adequate level, the price stability is achieved. For this reason the Eurosystem establishes a range of monetary policy instruments in the interest rates in order to lead them towards an adequate level. Exchange Policy

After the launch of the euro as a common currency, it is necessary a single Exchange rate and, for this reason, this policy is also in the hands of the Eurosystem with the ECB as a central institution. This Exchange policy can be also the competition of the EU Council, able to celebrate formal agreements, relating the euro interest rate with the non-Community currencies or to formulate general orientations for this policy, always taking into account the compatibility that must exist with the CEB aim of keeping the price stability.

The exchange policy is strongly related to the monetary policy. This one must be totally compatible with the main aim of the monetary policy that is the price stability. Fiscal Policies It deals with aspects related to the public expenditures and taxes, affecting the companies, productive activity and therefore the economic growth of a country. Despite of the creation of the EMU, the fiscal policy continues being the competition of every Member State, as it is indicated in the Stability and Growth Pact. Each Member State is fully responsible of its public revenue and expenditure.

This fiscal policy decentralization is due to the fact that in each country the sizing of the budgets and the priorities referring to revenue and expenditure is different, in addition to the public goods such as public health or education are supplied at a national level, what makes more difficult to impose a single fiscal policy. Another reason which leads to the fiscal policy decentralization is the fact that the national authorities must have certain tools to correct certain cyclical situations given in its economy.

Therefore, the fiscal policy is one of the most used instruments by the nations to correct these situations, since the monetary policy is given as exogenous. The fiscal policy is decentralised but, it must fulfil a range of established requirements in the Stability and Growth Pact (SGP), where the country must present annual stability programs describing its budget plans, which must try to achieve the budgetary positions close to balance o with surplus. Market Policy of Work and Employment

These policies are competition of the different member states’ governments, which try to fix salaries, which will generate a high level of employment and be compatible with the prices stability with the purpose of contributing to the achievement of the economic objectives of the Community. The decentralization of these policies is justified by the existence of great differences within the Euro-zone in the industrial structure, in the job market and in the productivity levels in the different industries, sectors and regions.

The flexibility given to the labour markets makes it difficult to reduce the high structural unemployment rates that exist in some member states. All the member states are highly compromised with the common aim of achieving a high level of employment, thus, these policies, purely national, begin to have a procedure of formal coordination, called “Luxemburg Process”, where are made some recommendations concerning training, education and job markets, which must follow the member states in their policies at a national level.

Microeconomic and Structural Policies It deals with policies affecting the market performance and the allocation of resources in them. They are competition of the Community and the national authorities. The Community regulates the market performance throughout regulations and directives, thus affecting to the decisions being taken in the companies and policymakers with the aim of achieving with it equality of conditions in the whole Single Market.

Despite of the regulation of the Community, the national authorities continue to be responsible of the structural policies, for example, investigation and development or relative regulations to the labour markets. The growth, the competitiveness and the employment of the member states improve due to the competitive pressures and the opening to the competition of previously monopolistic sectors. This higher competition in the markets generates cost reduction, profit margins reductions, productivity profit and a reduction of the inflation measured by the consumer prices.

These structural reforms have been very important to the whole Euro-zone, for this reason, throughout the “Cardiff Process” the member states are compromised to carry out a mutual evaluation, where the European Commission and the different member states must inform, annually about the performance of the product and capital markets. With them an exam of the structural reforms carried out by each country and its consequent reciprocal pressure is obtained.

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