A.  What is the Economic and Monetary Union (EMU)?
B.  What is the new European Currency?
C.  What is the Timeline for the EMU?
D.  EU Member States: Who is "in," who is "out," and why?

E.  What are the European System of Central Banks...?
F.  Why do convergence criteria exist, and what are they?
G.  How did the Members of the EU fare in regard to the convergence criteria?
H.  To whom is the ECB responsible for its monetary policy decisions?



A. What is the Economic and Monetary Union (EMU)?
The term 'EMU' means a single currency for a single market. Between 1987-1992, the EU established a single market within its borders. After 1992, capital and labor could both move freely within the EU.

More specifically, EMU refers to two principle changes currently taking place within the EU:

  • The change from a system of separate national currencies, separate national central banks, and separate national monetary policies to a single European currency (the Euro), a single European system of central banks, and a single European monetary policy.
  • The removal of all barriers to the movement of capital within the European Single Market.
Sources & Further Information:
  • Quest: A large database of questions and short answers concerning the EMU, maintained by the EU. Link: europa.eu.int/euro/quest/normal/frame.htm?language_nb=5. This information is also available on CD-ROM from the EU Delegation 
  • ECB web site: Contains links to all the EU central banks and daily euro foreign exchange reference rates. Link: www.ecb.int 
  • The European Union: A Guide for Americans, pp. 10-13
    (available through the European Union Delegation in Washington, DC)
  • "The Euro: Everything You Need to Know About Europe's New Currency," Europe Magazine, A Special Report, September 1997

 

B. What is the new European Currency?

The new European currency is formally called the euro. The symbol for the currency was inspired by the Greek letter epsilon, in reference to the cradle of European civilization and to the first letter of the word Europe.
 
 

Facts on the euro:

  • Each euro is divided into 100 cents.
  • The designs on the euro notes relate to the historical phases that make up Europe's architectural heritage.
  • Windows and gateways dominate the front sides of the notes, designed to symbolize the spirit of openness and cooperation in the EU.
  • The reverse side of each note features a bridge from a particular age, designed to symbolize communication among the people of Europe and between Europe and the rest of the world.
  • The euro coins have unique national designs on one side, and a common European design on the other.


Each Member State is responsible for minting the coins and printing the notes necessary for the transition in their particular country. Should all Member States be part of the single currency by the time the currency goes into circulation, approximately 12 billion bank notes and 70 billion coins will need to be changed.
 
 

Sources & Further Information:

 

 

C. What is the Timeline for the EMU?

 
Stage I:  Commenced on 1 July 1990
  • 1990 - The EU Member States participating in the EMU made a commitment to increase coordination of economic policies to lay a foundation for fixing the exchange rates of their currencies to one another (see "EU Member States: Who is 'in,' who is 'out,' and why?").
  • 1991 - The Treaty on European Union signed in December. Member States must meet five convergence criteria for membership in the single currency union.


Stage II:  Commenced on 1 January 1994


Stage III:  Commenced on 1 January 1999

  • 1999 - The euro becomes a currency in its own right. Banks and businesses transfer to the euro for accounting purposes (no euro notes or coins yet in circulation).
  • 2002 - Euro notes and coins go into circulation January 1st.
  • 2002 - The status of national notes and coins as legal currency will be abolished by July 1st (at the latest).




Sources & Further Information:

 

D. Member States: Who is "in," who is "out," and why?
 

Of the 15 EU Member States, two exercised their right not to join the single currency at the start, and two others failed to meet the criteria necessary for membership.
 

The 11 Member States in the EMU:
 
 

 
 
 
 
 

 

The 4 Member States not in the EMU:
 
 

 

 
  • Denmark and The United Kingdom exercised their right to opt out of membership in the single currency
  • Greece and Sweden were deemed ineligible for membership in 1998. Greece failed to meet the convergence criteria (see "Why a set of convergence criteria and what are they?"). Swedish legislation regulating the national central bank was deemed incompatible with the Maastricht Treaty (the Treaty set the conditions for membership in the single currency).
Sources & Further Information:

 

E. What are the European System of Central Banks, the European Central Bank, the Governing Council, the "Eurosystem," and "Euroland"?

The European System of Central Banks (ESCB):

The ESCB is the body charged with managing the money in circulation, conducting foreign exchange operations, holding and managing the Member States' official foreign reserves, and promoting the smooth operation of payment systems.

The ESCB is comprised of the national central banks of the 15 EU Member States and the European Central Bank (ECB). The ESCB is loosely analogous to the Federal Reserve Board of Governors (see "The Fed and the ECB - similarities and differences").

The European Central Bank (ECB):

The ECB implements the monetary policy decisions of the Governing Council (see below). It is headed by a six member Executive Board, appointed by the Council of Europe for non-renewable eight-year terms. The ECB is loosely analogous to the Federal Reserve System (see "The Fed and the ECB - similarities and differences").

The Governing Council (GC):

The GC determines monetary policy for the Member States participating in the single currency. The GC is comprised of the 11 governors of the participating national central banks, and the six members of the Executive Board of the ECB. Decisions are made by majority vote under the rule, 'one person-one vote' (see "The Fed and the ECB - similarities and differences").

The Eurosystem:

'Eurosystem' refers to the 11 national central banks participating in the single currency and the ECB (in contrast to the ESCB, which includes the ECB and all the EU central banks).

Euroland:

Euroland refers to the area within the EU where the single currency has been adopted (i.e. the area covered by the 11 participating Member States).

Sources & Further Information:

ECB web site with links to all the EU central banks and daily euro foreign exchange reference rates.
Link: www.ecb.int

"The Euro: Everything You Need to Know About Europe's New Currency," Europe Magazine, A Special Report, September 1997

 

F. Why do Convergence Criteria exist and What are they?

In 1992, the Maastricht Treaty established a set of convergence criteria (otherwise known as the Maastricht criteria) that all prospective members of the EMU would have to meet before joining the single currency. With the criteria, the Heads of State intended to produce a convergence in economic performance across the EU, so that all countries joining the single currency entered on the basis of similar economic conditions and sound public finances.

The five criteria are outlined below:

Price Stability: the rate of inflation may not exceed the average rates of inflation of the three Member States with the lowest inflation by more than 1.5%

Interest Rates: long-term interest rates shall not vary by more than 2% in relation to the average interest rates of the three Member States with the lowest interest rates

Deficits: national budget deficits must be close to or below 3% of GNP

Debt: public debt may exceed 60% of GNP only if the trend is declining toward this level

Exchange Rate Stability: a national currency shall not have been devalued during the two previous years and must have remained within the EMS 2.25% margin of fluctuation

In 1998, when the Council of Europe decided which Member States would participate in the EMU, few countries had succeeded in complying with all the convergence criteria. However, in order not to delay the EMU and risk the possibility of early failure, only Greece and Sweden were denied membership from the outset (see "EU Member States: Who is 'in,' who is 'out,' and why?").

Sources & Further Information:

Quest: A large database of questions and short answers on the EMU, maintained by the EU.
Link: europa.eu.int/euro/quest/normal/frame.htm?language_nb=5.

Also available on CD-ROM from the EU Delegation "The Euro: Everything You Need to Know About Europe's New Currency," Europe Magazine, A Special Report, September 1997

 

G. How did the EU Members perform in regard to the convergence criteria in 1998?
 
 

CONVERGENCE CRITERIA


 
Price Stability
Interest Rates
Deficits
Debt
Exchange Rate
Austria
Yes
Yes
Yes
Yes
Yes
Belgium
Yes
Yes
Yes
*
Yes
Denmark
Yes
Yes
Yes
Yes
Yes
France
Yes
Yes
Yes
Yes
Yes
Finland
Yes
Yes
Yes
Yes
Yes
Germany
Yes
Yes
Yes
Yes
Yes
Greece
No
No
Yes
*
N/A
Ireland
Yes
Yes
Yes
Yes
Yes
Italy
Yes
Yes
Yes
*
Yes
Luxembourg
Yes
Yes
Yes
Yes
Yes
Netherlands
Yes
Yes
Yes
*
Yes
Portugal
Yes
Yes
Yes
Yes
Yes
Spain
Yes
Yes
Yes
Yes
Yes
Sweden
Yes
Yes
Yes
*
N/A
UK
Yes
Yes
Yes
Yes
N/A
(Source: Euro 1999, Part 2: Report, European Commission, 1998)
Yes = Met the relevant criterion
No = Did not meet the relevant criterion
* = Debt exceeded the reference value but was considered to be "declining sufficiently" to warrant acceptance of membership 

 

H. To whom is the ECB responsible for its monetary policy decisions?

The ECB is ultimately responsible to the Council of Europe (i.e. the Heads of Government or State of the EU Member States). The Council signed the Maastricht Treaty, which brought the ECB into existence. Therefore, they are the only group with the power to revise the Statutes of the ECB (because the Statuses were established under a treaty, any revision requires unanimous approval). In addition, the Council of Europe appoints the members of the Executive Board (in consultation with the ECB, the European Commission, and the European Parliament - which means the latter's views must be considered when the Council makes a decision on appointment).
 

The ECB was purposely established with a large degree of autonomy (in fact, a greater degree of autonomy than any central bank in existence today). This autonomy is designed to reduce political interference in the formation of monetary policy (see "The Fed and the ECB - similarities and differences").
 

 The ESCB Statutes provide that:

  • No member of the Governing Council may take directives from any outside individual or government
  • Voting decisions within the Governing Council are kept secret


Nevertheless, a number of communication channels are open between the ECB and the other principle institutions of the EU:
 

  • The President of the Executive Board of the ECB is required to meet with the Council of Ministers as requested when the Council is composed of the Ministers of Economy and Finance (ECOFIN).
  • The President of the Council of Ministers and a member of the European Commission may attend meetings of the Governing Council
  • The President of the Executive Board of the ECB goes before the European Parliament to report on monetary policy four times a year
  • The ECB publishes a monthly report (the reports are publically available at www.ecb.int)
Sources & Further Information
  • 'The European Union in the US' web site. Link: www.eurunion.org
  • Quest: A large database of questions and short answers on the EMU, maintained by the EU. Link: europa.eu.int/euro/quest/normal/frame.htm?language_nb=5.
    Also available on CD-ROM from the EU Delegation in Washington, DC
  • ECB web site with links to all the EU central banks and daily euro foreign exchange reference rates. Link: www.ecb.int
  • "The Euro: Everything You Need to Know About Europe's New Currency," Europe Magazine, A Special Report, September 1997
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Part II. EMU [1] [2] [3] [4] [5] [6] [7] [8] [9] [10]