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EUROPEAN MONETARY UNION(EMU)
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Monetary Union
Amonetary union is an arrangement whereseveral countries have
agreed to share a singlecurrency amongst themselves.
The European Economic and MonetaryUnion (EMU) consists of three
stages :1. coordinating economic policy,
2. achieving economic convergence (that is,their economic cycles
are broadly in step) and3. culminating with the adoption of the
euro, theEU's single currency.
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All member states of the European Union are
expected to participate in the EMU. The Copenhagen criteria is
the current set of
conditions of entry for states wanting to join theEU. It
contains the requirements that need to be
fulfilled and the time framework within whichthis must be done
in order for a country to jointhe monetary union.
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Two main components to MonetaryUnion :1. Exchange rate union
countries agree to permanently fixing of theirexchange rates
with no margin of fluctuation.
Creation of a single currency is the logicaloutcome of such a
situation emphasizing the
permanency of arrangement.
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2. Complete capital market integration :
All obstacles to the free movement of financialcapital between
union members are removed.
equal treatment to financial capital throughoutthe members of
the union.
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EXPLICT REQUIREMENT
Harmonised monetary policy
Need of a central bank
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yMonetary union fixed exchange
rate
Permanent commitment topeg the exchangete leading tologically
leading to thecreation of a single currency.
Requires a well developedinstitutional framework suchas a single
union central bank.
Free movement of financialcapital between membercountries.
Allows for occassionalrealignments and usuallypermits ,argins of
fluctuationaround central rate.
Does not require.
Exchange rate parities areoften defended only by resortto
capital controls.
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Benefits of EMU
1. Stimulus to intra- EU trade
Removal of barriers to trade increase volume of trade between
member
countries.
Rise in economic prosperity of its members.
For this a common medium of exchange isneeded.
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2. More efficient allocation of factors ofproduction within the
EU
The permanent allocation of exchange ratecontrols and absence of
uncertainty created byexchange rate fluctuation would no doubt
leadto a more efficient allocation of capital within
the union. similarly, once wages and salaries are
expressed in terms of a common currency,EMU should result in a
better allocation of
labour, as labour moves from areas of low-marginal ti high-
productivity regions.
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3. Uncertainty caused by Exchange rate
fluctuations eliminated. Many firms become wary when investing
inother countries because of the uncertaintycaused by the
fluctuating currencies in the EU.
Investment would rise in the EMU area as thecurrency is
universal within the area, thereforethe anxiety that was previously
apparent is thereno more.
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