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European Economic and Monetary Union (EMU)

European Economic and Monetary Union (EMU)

What Is the European Economic and Monetary Union (EMU)?

The European Economic and Monetary Union (EMU) consolidates several of the European Union (EU) member states into a durable economic system. It is the replacement to the European Monetary System (EMS). Note that there is a difference between the 19-member European Economic and Monetary Union (EMU), and the bigger European Union (EU) that has 27 member states.

Likewise alluded to as the Eurozone, the European Economic and Monetary Union (EMU) is a seriously broad umbrella, under which a group of policies has been instituted focused on economic convergence and free trade among European Union member states. The EMU's development happened through a three-phase process, with the third phase starting the adoption of the common euro currency in place of former national currencies. This has been completed by all initial EU members with the exception of the United Kingdom and Denmark, who have quit embracing the euro. The U.K. in this way left the EMU in 2020 following the Brexit mandate.

History of the European Monetary Union (EMU)

The principal efforts to make an European Economic and Monetary Union started after World War I. On Sept. 9, 1929, Gustav Stresemann, at an assembly of the League of Nations, inquired, "Where is the European currency, the European stamp that we really want?" Stresemann's elevated manner of speaking immediately became indiscretion, in any case, when minimal over a month after the fact the Wall Street crash of 1929 denoted the emblematic onset of the Great Depression, which not just wrecked talk of a common currency, it likewise split Europe strategically and prepared for the Second World War.

The modern history of the EMU was reignited with a discourse given by Robert Schuman, the French Foreign Minister at that point, on May 9, 1950, that later came to be called The Schuman Declaration. Schuman contended that the best way to guarantee peace in Europe, which had been destroyed two times in thirty years by wrecking wars, was to tie Europe as a single economic entity: "The pooling of coal and steel production ... will change the fates of those areas which have long been given to the assembling of weapons of war, of which they have been the most steady casualties." His discourse prompted the Treaty of Paris in 1951 that made the European Coal and Steel Community (ECSC) between treaty endorsers Belgium, France, Germany, Italy, Luxembourg, and the Netherlands.

The ECSC was consolidated under the Treaties of Rome into the European Economic Community (EEC). The Treaty of Paris was not a permanent treaty and was set to lapse in 2002. To guarantee an additional permanent union, European lawmakers proposed plans during the 1960s and 1970s, including the Werner Plan, yet worldwide, undermining economic occasions, similar to the furthest limit of the Bretton Woods currency agreement and the oil and inflation shocks of the 1970s, delayed substantial moves toward European integration.

In 1988, Jacques Delors, the President of the European Commission, was approached to meet an impromptu committee of member states' central bank governors to propose a substantial plan to additional economic integration. Delors' report prompted the creation of the Maastricht Treaty in 1992. The Maastricht Treaty was responsible for the foundation of the European Union.

One of the Maastricht Treaty's needs was economic policy and the convergence of EU member state economies. In this way, the treaty laid out a timetable for the creation and implementation of the EMU. The EMU was to incorporate a common economic and monetary union, a central banking system, and a common currency.

In 1998, the European Central Bank (ECB) was made, and toward the year's end conversion rates between member states' currencies were fixed, a preface to the creation of the euro currency, which started circulation in 2002.

Convergence criteria for countries interested in joining the EMU incorporate reasonable price stability, sustainable and responsible public finance, reasonable and responsible interest rates, and stable exchange rates.

European Monetary Union and the European Sovereign Debt Crisis

Adoption of the euro precludes monetary flexibility, so that no committed country might print its own money to pay off government debt or deficit, or contend with other European currencies. Then again, Europe's monetary union is definitely not a fiscal union, and that means that various countries have different tax designs and spending needs. Thus, all member states had the option to borrow in euros at low-interest rates during the period before the global financial crisis, yet bond yields didn't mirror the different creditworthiness of member countries.

Greece as an Example of the Challeneges in the EMU

There have been several episodes with different member nations that have caused stress for the stability and eventual fate of the common currency. Greece, maybe, addresses the most high-profile illustration of the difficulties in the EMU. Greece uncovered in 2009 that it had been downplaying the seriousness of its deficit since embracing the euro in 2001, and the country experienced perhaps of the most awful economic crisis in recent history. Greece accepted two bailouts from the EU in five years, and short of leaving the EMU, future bailouts will be vital for Greece to keep on paying its creditors.

Greece's initial deficit was made by its disappointment collect adequate tax revenue, combined with a rising unemployment rate. The current unemployment rate in Greece as of April 2019 is 18%. In July 2015, Greek authorities announced capital controls and a bank holiday and restricted the number of euros that could be taken out each day.

The EU has given Greece a final proposal: acknowledge severe austerity measures, which numerous Greeks trust caused the crisis in any case, or leave the EMU. On July 5, 2015, Greece casted a ballot to dismiss EU austerity measures, provoking speculation that Greece could exit the EMU. The country presently risks either economic collapse or strong exit from the EMU and a return to its former currency, the drachma.

The drawbacks of Greece returning to the drachma incorporate the possibility of capital flight and a doubt of the new currency outside of Greece. The cost of imports, on which Greece is exceptionally dependent, would increase decisively as the buying power of the drachma declines relative to the euro. The new Greek central bank may be enticed to print money to keep up with essential services, which could lead to serious inflation or, in the worst situation imaginable, hyperinflation. Black markets and different indications of a failed economy would show up. The risk of contagion, then again, might be limited on the grounds that the Greek economy accounts for just two percent of the Eurozone economy.

Then again, on the off chance that the Greek economy recuperates or flourishes subsequent to leaving the EMU and European forced austerity, different countries, like Italy, Spain, and Portugal, may scrutinize the tight austerity of the euro and furthermore be moved to leave the EMU.

Starting around 2020, Greece stays in the EMU, however pressures hostile to Greek sentiment is on the ascent in Germany, which could add to previously building strains in the EU and EMU.


  • The decision to form the EMU was adopted by the European Council in the Dutch city of Maastricht in December 1991 and was subsequently revered in the Treaty on European Union (the Maastricht Treaty).
  • 2002 saw the presentation of the common euro currency at last supplanting the national currencies of most EU member states.
  • The European Economic and Monetary Union (EMU) includes the coordination of economic and fiscal policies, a common monetary policy, and a common currency, the euro among 19 Eurozone nations.