1. European Monetary Union

2. Evolution of the EU 1951: European European Steel and Coal Community. 1957: European Economic Community, the ‘Common Market’ 1967: Becomes the EC with a European Parliament. 1979: ERM is launched. 1993: The Single Market 1993: Maastricht Treaty – the EU 2002: 12 countries adopt the euro 2004: Expansion of EU to include 25 countries

3. The Single Market The free movement of goods, services, people and capital. No barriers to trade. The EEC was a customs union. EEC established the CAP. Single Market measures came into effect in 1993.

4. Benefits of a Single Market TRANSACTION COSTS: A number of non – tariff barriers had built up. It was expected that the removal of these would reduce the cost of trade. ECONOMIES OF SCALE: Larger markets should equate to larger economies of scale. MORE COMPETITION: This may lead to more efficieny

5. European Monetary System 3 Features: ECU, ERM, EMCF. ECU: a composite currency ERM: a ‘parity grid’ system. Fluctuations allowed (2.25%)If diverges beyond this, central bank intervention.If this continues, can consider realignment. EMCF: a forerunner to ECB. Mainly to allow credit facilities to allow member countries to support their exchange rates.

6. The ERM There was initially many reallignments (high French and Italian inflation) 1987 – 1992: Growing convergence between members By 1990 seen to be a success.

7. The UK and the ERM Initially against joining the ERM because: UK had a higher ‘endemic’ inflation rate. UK an oil exporter. UK set monetary targets which meant allowing interest rates to fluctuate. BUT, by the late 1980’s, e/r volatility seen as bad, inflation down and oil no longer such an important part of BOP.

8. The UK and the ERM Joined ERM in 1990 at DM 2.95 6% band for fluctuations. BUT economy went into recession and inflation fell. Interest rates needed to fall. BUT – would push £ to bottom of band.

9. Progression to EMU As the 1990’s progressed, economies of EU were converging. Maastricht Treaty criteria: Monetary Policy Inflation: no more than 1.5% above the average of 3 lowest 3 countries Interest and Exchange Rates: No more than 2% above the average of 3 lowest. Fiscal Policy: Budget deficit to be no larger than 3% of GDP and national debt no larger than 60% of GDP.

10. Progression to EMU 11 countries met the Maastricht criteria. Exchange rates permanantly fixed in Jan 1999, and the euro came into operation on 1 January 2002.

11. Advantages of EMU Reduced exchange rate costs Greater price transparency More trade / economies of scale Inward investment Macro-economic management Longer term agenda

12. Disadvantages of EMU Transition costs Loss of policy independence Structural problems Loss of political sovereignty