Development of the EMU

Question 1

EERM

Answer 1

• Originated in 1978.
• Established the European Economic Exchange Rate Mechanism - designed to reduce the biggest trade issue of exchange rate variability, achieving monetary stability in Europe.

Question 2

Maastrich Treaty (1992)

Answer 2

Established the Economic Monetary Union (EMU) = its’ policies aims to create a more prosperous, stable and united EU by coordinating the economic, fiscal and monetary policies of its members in three stages.

Question 3

Dublin Summit (1996)

Answer 3

Established the Stability and Growth Pact (SGP) to ensure EMU members had strict budgetary discipline to maintain stability. However, the SGP was non-binding and some members didn’t comply.

Question 4

EMU through time

Answer 4

• The financial crisis of 2008 strengthened the case for further EMU to help the EU withstand external economic threats.
• 2012 = the Fiscal Compact required states to balance their budgets and accelerated steps towards convergence - only the UK and the Czech Republic opted out.
• Because of Brexit, it’s unlikely the EU will eventually achieve total economic and monetary union - significantly closer to becoming a full political union since all economic and monetary policy will be decided supranationally.
• 2019 = 19 members accepted a complete EMU, comprising the Eurozone. 7 other states were working towards EMU with the UK and Denmark securing opt-outs.

Question 5

Economic benefits of EMU

Answer 5

• Removes trade obstacles by extending the Single Market - free from the constraints of currency conversion rates, it creates a certainty in trade prices, enabling trade on lower profit margins and therefore creating savings and reducing prices.
• Greater transparency over prices, which benefits producers, cross-border traders and consumers alike.
• SGP ensures economic stability and low inflation.
• Theoretically less vulnerable to world currency markets, providing the EU greater financial and economic global influence (within IGOs, the EU can counterbalance the USA).

Question 6

Political benefits of EMU

Answer 6

• Pooling sovereignty strengthens EMU member-state sovereignty - an increasingly globalised world in which national monetary sovereignty is already challenged.
• Before its establishment, the German Federal Bank rather than the ECB controlled EU monetary policies - disliked by many European countries but the EMU addresses this.
• Many see the EU as a step towards a federalist political union and a stronger European identity, enabling greater integration - including harmonising taxes or larger budgets to offset the negative impacts of depressed areas.

Question 7

Economic drawbacks of EMU

Answer 7

• Economic risks, including the capacity for the ECB to misjudge monetary policy and the potential for EMU govts to ignore SGP rules (France and Germany exceeding the 3% of GDP limit on a state’s budget of deficit).
• Policies don’t benefit all states - e.g interest rates may have a negative impact.
• SGP gives EMU members the ability to employ measures traditionally used to boost weakened economies, e.g raising public spending to tackle unemployment.
• Costs sovereignty over some key areas of economic and monetary policies - element of hypocrisy on how to enforce this.
• Democratic deficit - responsibility to regulate monetary policy is transferred to an unelected independent central body.