Economic and monetary union

Cooperation among countries increases even more with an economic and monetary union (EMU). Some authorities prefer to distinguish a monetary union from an economic union. In essence, mone- tary union means one money (i.e., a single currency). The Delors Committee, chaired by Jacques Delors, who is President of the European Commission, has issued a report entitled Economic and Monetary Union in the European Community that defines monetary union as having three basic characteristics: total and irreversible convertibility of currencies; complete freedom of capital move- ments in fully integrated financial markets; and irrevocably fixed exchange rates with no fluctua- tion margins between member currencies, leading ultimately to a single currency. The economic advantages of a single currency include the elimi- nation of currency risk and lower transaction costs. One European Commission study found that European businesses were spending $12.8 billion (0.4 percent of the EU’s GDP) a year on currency conversions.

The European Commission’s One Market, One Money report defines an economic union as a single market for goods, services, capital, and labor, com- plemented by common policies and coordination in several economic and structural areas.18 An eco- nomic union provides a number of benefits. In terms of efficiency and economic growth, the transaction costs associated with converting one currency into another are eliminated, and the elimination of foreign exchange risk should improve trade and capital mobility. In addition, stronger competition policies should promote efficiency gains. In terms of inflation, the implementation of an economic union is a demonstration of a credible commitment to stable prices.

According to the Delors Committee, the basic elements of an economic union include the follow- ing: a single market within which persons, goods, services, and capital could move freely; a joint com- petition policy to strengthen market mechanisms; common competition, structural, and regional poli- cies; and sufficient coordination of macroeconomic policies, including binding rules on budgetary policies regarding the size and financing of national budget deficits.

A good example of an economic and monetary union is the unification of East Germany and West Germany. The terms of the monetary union called for an average currency conversion rate of M 1.8 to DM 1 and a conversion of East German wages at parity into deutschmarks. The 1 July 1990

German Economic and Monetary Union has resulted in one Germany. In addition to sharing a common, freely convertible currency (the

deutschmark), the legal environment, commercial code, and taxation requirements in the German Democratic Republic (East Germany) are now the same as those of the Federal Republic of Germany (West Germany).

Following a transition period, several European currencies were replaced by a new currency called the euro (see Cultural Dimension 2.1). At the beginning of 2002, twelve EU countries (not count- ing Denmark, Sweden, and the United Kingdom) introduced euro coins and notes. In 2003, follow- ing in the footsteps of Denmark three years earlier, the Swedes voted overwhelmingly to reject mem- bership in the European single currency.

The EU member states have ceded substantial sovereignty to the EU. As an example, Denmark was required by the EU to comply with common pack- aging rules and remove its twenty-year-old ban on beers and soft drinks in metal cans.19

CULTURAL DIMENSION 2.1 THE EURO

On January 1, 1999, the European Union adopted the euro as its common currency. As the participating nations adopted the euro, there was a transition cost in terms of the temporary loss of output and the pos- sible increase in unemployment due to the required adjustment to the price stability and fiscal criteria laid out in the Maastricht Treaty. Banks in particular had to bear the cost of $10 billion to $13 billion (about

2 percent of annual operating costs over a changeover period), with software alterations accounting for half of the cost. By 2002, the substitution of euro notes and coins was complete.

Euro is the official name of the European Union’s currency. Before the name was finally chosen, some European leaders did the last-minute lobbying for their favored names. French President Jacques Chirac wanted to call the currency the Ecu since the name has historical significance for France. Britain’s Prime Minister John Major, on the other hand, preferred names such as the crown, florin, or shilling – all of which have roots in England.

In the end, the European leaders decided against using the name euro as a prefix (e.g., euro-mark, euro- pound). Euro was probably chosen because the name was the least offensive.

Robert Kalina was given a task of designing a set of eurobank notes. According to the rules, the designs could not be related to a specific country. So he used bridges and windows to span seven historical periods: Classical, Renaissance, Baroque, Rococo, the age of iron and glass, and modern twentieth-century architec- ture. One can see through or walk through windows and doors; opening them symbolizes the future. Bridges offer a connecting element: communication. These ele- ments were designed to appeal to 300 million people in twelve countries. However, euro coins have national designs on one side and a universal design on the other.

Sources: “Euro Is Official Name of European Currency,” San José Mercury News, December 16, 1995; “Now the Hard Part: Imposing a Common Currency,” Wall Street Journal, July 28, 1995; “Note Design Aims for Broad Appeal,” Bangkok Post, December 27, 2001.

The EU is unique in the sense that it is the first time that advanced economies have agreed to coop- erate economically at such a grand scale. Naturally, with the fall of the Berlin wall in 1989, countries emerging from communism coveted EU member- ships, while the EU leaders were stalling them. But the Yugoslav wars made the EU aware of the need to enlarge Europe’s security zone. After all, if sta- bility were not exported from the West, instability might be imported instead from the East.20 So the EU is expanding. Ten new members have been admitted for accession in 2004. The ten new members are: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. Turkey, Bulgaria, and Romania have candidate status.While Bulgaria and Romania are on course for accession in 2007, Turkey was told to wait at least two more years before starting talks on joining.21

Date: 2014-12-21; view: 1044