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Unit IX European Union and
Euro
Day and Date:
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Unit Highlights
Formation ofEuropean Union (EU)
Introduction ofEuro
Concept ofoptimum currency areas
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Text book reference chapters
International Economics by Dominick
Salvatore Chapter10
International Economics by Francis
Cherunilam Chapter13
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Let us recapitulate
European Union (EU), a Customs Union, was
formed in 1958
A Customs Union removes all trade barriers among
membernations as well as adopts a common
commercial policy with the rest of the world.
EU became European Common Market in 1993
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European Union (EU)
The Customs Union, formed by Germany,France, Italy, Belgium, the
Netherlands, andLuxembourg came into existence in July1,1958, By
the virtue ofTreaty ofRome,1957
It expanded to 15 nations with the joining of UK, Denmark, and
Ireland in 1973, Greece in 1981, Spain and Portugal in 1986, and
Australia, Finland and Sweden in 1995.
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EUThe basis of its formation
Elimination of trade barriers
Common tariffon imports fromrest of the
world Free movement ofresources
Harmonizing fiscal, monetary, and socialsecurity policies
Adopt a common policy on agriculture,transport, and competition
in industry
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EURO ()
Common currency adopted at the beginning
of1999 by 11 ofthe 15 membercountries ofthe EU.
The 11 countries Austria, Belgium, Germany, Finland, France,
Ireland, Italy, Luxembourg, Spain, Portugal, and Netherlands
Greece was admitted on Jan.1, 2001
Britain, Sweden and Denmark chose not toparticipate.
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Creation of the Euro
One of the most important events in
post-warmonetary history.
Introduced from January 1, 1999 as aunit ofaccount.
Circulated as sole legal tender in the
participating nations by July1, 2002
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Optimum currency area/bloc
A groupofnations whose national currencies
are linked throughpermanently fixedexchange rates.
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Optimum currency area
Advantages for member nations
Eliminates uncertainties
Greaterprice stability
Saves the cost ofofficial intervention in FXmarket
Saves cost ofhedging
Saves cost ofexchanging FX/maintaining FX
reserves forpayment of imports orenablingforeign travel
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Optimum currency area
Disadvantage for member nations
Independent stabilization and growthpolicies
cannot be pursued
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Optimum currency
areamaximizing benefits
Benefits can be maximized and costs can be
minimized when there is, greaterresource mobility
greaterstructural similarities
close coordination in fiscal, monetary, andsocial policies
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To conclude
Economies have increasingly become more
interdependent. International policycoordination is, hence, not
only desirable but
essential.
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You should now be able to
Trace the formation ofEuropean Union.
Explain Euro.
Elucidate on OptimumCurrency Area, itsbenefits, and costs
tomembernations.
