The economic and monetary union (EMU) of the European Union is a group of policies aimed at converging the economies of member states of the European Union at three stages.
There are three stages of the EMU, each of which consists of progressively closer economic integration. Only once a state participates in the third stage it is permitted to adopt the euro as its official currency. As such, the third stage is largely synonymous with the eurozone. The euro convergence criteria are the set of requirements that needs to be fulfilled in order for a country to be approved to participate in the third stage. An important element of this is participation for a minimum of two years in the European Exchange Rate Mechanism ("ERM II"), in which candidate currencies demonstrate economic convergence by maintaining limited deviation from their target rate against the euro.
The EMU policies cover all European Union member states. All new EU member states must commit to participate in the third stage in their treaties of accession and are obliged to enter the third stage once they comply with all convergence criteria. Twenty EU member states, including most recently Croatia, have entered the third stage and have adopted the euro as their currency. Denmark, whose EU membership predates the introduction of the euro, has a legal opt-out from the EU Treaties and is thus not required to enter the third stage.[1] [2]
The idea of an economic and monetary union in Europe was first raised well before establishing the European Communities. For example, the Latin Monetary Union existed from 1865 to 1927.[3] [4] In the League of Nations, Gustav Stresemann asked in 1929 for a European currency[5] against the background of an increased economic division due to a number of new nation states in Europe after World War I.
In 1957 at the European Forum Alpbach, De Nederlandsche Bank Governor Marius Holtrop argued that a common central-bank policy was necessary in a unified Europe, but his subsequent advocacy of a coordinated initiative by the European Community's central banks was met with skepticism from the heads of the National Bank of Belgium, Bank of France and Deutsche Bundesbank.[6]
A first concrete attempt to create an economic and monetary union between the members of the European Communities goes back to an initiative by the European Commission in 1969, which set out the need for "greater co-ordination of economic policies and monetary cooperation,"[7] which was followed by the decision of the Heads of State or Government at their summit meeting in The Hague in 1969 to draw up a plan by stages with a view to creating an economic and monetary union by the end of the 1970s.
On the basis of various previous proposals, an expert group chaired by Luxembourg's Prime Minister and Finance Minister, Pierre Werner, presented in October 1970 the first commonly agreed blueprint to create an economic and monetary union in three stages (Werner plan). The project experienced serious setbacks from the crises arising from the non-convertibility of the US dollar into gold in August 1971 (i.e., the collapse of the Bretton Woods System) and from rising oil prices in 1972. An attempt to limit the fluctuations of European currencies, using a snake in the tunnel, failed.
See main article: Delors Committee.
The debate on EMU was fully re-launched at the Hannover Summit in June 1988, when the ad hoc Delors Committee of the central bank governors of the twelve member states, chaired by the President of the European Commission, Jacques Delors, was asked to propose a new timetable with clear, practical and realistic steps for creating an economic and monetary union.[8] This way of working was derived from the Spaak method.
The Delors report of 1989 set out a plan to introduce the EMU in three stages and it included the creation of institutions like the European System of Central Banks (ESCB), which would become responsible for formulating and implementing monetary policy.[9]
The three stages for the implementation of the EMU were the following:
There have been debates as to whether the Eurozone countries constitute an optimum currency area.[10]
There has also been significant doubt if all eurozone states really fulfilled a "high degree of sustainable convergence" as demanded by the Maastricht treaty as condition to join the Euro without getting into financial trouble later on.
Since membership of the eurozone establishes a single monetary policy and essentially use of a 'foreign currency' for the respective states, they can no longer use an isolated national monetary policy as an economic tool within their central banks. Nor can they issue money to finance any required government deficits or pay interest on government bond sales. All this is effected centrally from the ECB. As a consequence, if member states do not manage their economy in a way that they can show a fiscal discipline (as they were obliged by the Maastricht treaty), the mechanism means a member state could effectively 'run out of money' to finance spending. This is characterized as a sovereign debt crisis where a country is without the possibility of refinancing itself with a sovereign currency. This is what happened to Greece, Ireland, Portugal, Cyprus, and Spain.[11]
Being of the opinion that the pure austerity course was not able to solve the Euro-crisis, French President François Hollande reopened the debate about a reform of the architecture of the Eurozone. The intensification of work on plans to complete the existing EMU in order to correct its economic errors and social upheavals soon introduced the keyword "genuine" EMU.[12] At the beginning of 2012, a proposed correction of the defective Maastricht currency architecture comprising: introduction of a fiscal capacity of the EU, common debt management and a completely integrated banking union, appeared unlikely to happen.[13] Additionally, there were widespread fears that a process of strengthening the Union's power to intervene in eurozone member states and to impose flexible labour markets and flexible wages, might constitute a serious threat to Social Europe.[14] In the negotiation process, member states advocated different solutions depending on their political and political characteristics, while the result was a broad compromise. [15] [16]
In December 2012, at the height of the European sovereign debt crisis, which revealed a number of weaknesses in the architecture of the EMU, a report entitled "Towards a genuine Economic and Monetary Union" was issued by the four presidents of the Council, European Commission, ECB and Eurogroup. The report outlined the following roadmap for implementing actions being required to ensure the stability and integrity of the EMU:[17]
| Roadmap | Action plan | Status as of June 2015 |
|---|---|---|
| Stage 1: Ensuring fiscal sustainability and breaking the costly link between banks and sovereigns | Framework for fiscal governance shall be completed through implementation of: Six-Pack, Fiscal Compact, and Two-Pack. | Point fully achieved through entry into force of the Six‑Pack in December 2011, Fiscal Compact in January 2013 and Two‑Pack in May 2013. |
| Establish a framework for systematic Ex Ante Coordination of major economic policy reforms . | A pilot project was conducted in June 2014, which recommended the design of the yet to be developed Ex Ante Coordination (EAC) framework, should be complementary to the instruments already in use as part of the European Semester, and should be based on the principle of "voluntary participation and non-binding outcome". Meaning the end result of an EAC should not be a final dictate, but instead just an early delivered politically approved non-binding "advisory note" put forward to the national parliament, which then can be taken into consideration, as part of their process on improving and finalizing the design of their major economic reform in the making.[18] | |
| Establish European Banking Supervision as a first element of the Banking union of the European Union, and ensure the proposed Capital Requirements Directive and Regulation (CRD‑IV/CRR) will enter into force. | This point was fully achieved, when CRD‑IV/CRR entered into force in July 2013 and European Banking Supervision became operational in November 2014. | |
| Agreement on the harmonisation of national resolution and deposit guarantee frameworks, so that the financial industry across all countries contribute appropriately under the same set of rules. | This point has now been fully achieved, through the Bank Recovery and Resolution Directive which established a common harmonized framework for the recovery and resolution of credit institutions and investment firms found to be in danger of failing, and through the Deposit Guarantee Scheme Directive which regulates deposit insurance in case of a bank's inability to pay its debts. | |
| Establish a new operational framework under the auspice of the European Stability Mechanism (ESM), for conducting "direct bank recapitalization" between the ESM rescue fund and a country-specific systemic bank in critical need, so that the general government of the country in which the beneficiary is situated won't be involved as a guaranteeing debtor on behalf of the bank. This proposed new instrument, would be contrary to the first framework made available by ESM for "bank recapitalizations", which required the general government to step in as a guaranteeing debtor on behalf of its beneficiary banks – with the adverse impact of burdening their gross debt-to-GDP ratio. | ESM made the proposed "direct bank recapitalization" framework operational starting from December 2014, as a new novel ultimate backstop instrument for systemic banks in their recovery/resolution phase, if such banks will be found in need to receive additional recapitalization funds after conducted bail-in by private creditors and regulated payment by the Single Resolution Fund.[19] | |
| Stage 2: Completing the integrated financial framework and promoting sound structural policies | Complete the Banking union of the European Union, by establishing the Single Resolution Mechanism (SRM) as a common resolution authority and setting up the Single Resolution Fund (SRF) as an appropriate financial backstop. | SRM was established in January 2015, SRF started working from January 2016. |
| Establish a new "mechanism for stronger coordination, convergence and enforcement of structural policies based on arrangements of a contractual nature between Member States and EU institutions on the policies countries commit to undertake and on their implementation". The envisaged contractual arrangements "could be supported with temporary, targeted and flexible financial support", although if such support is granted it "should be treated separately from the multiannual financial framework". | Status unknown. | |
| Stage 3: Improving the resilience of EMU through the creation of a shock-absorption function at the central level | "Establish a well-defined and limited fiscal capacity to improve the absorption of country-specific economic shocks, through an insurance system set up at the central level." Such fiscal capacity would reinforce the resilience of the eurozone, and is envisaged to be complementary to the "contractual arrangements" created in stage 2. The idea is to establish it as a built-in incentives-based system, so that eurozone Member States eligible for participation in this centralized asymmetrically working "economic shock-absorption function" are encouraged to continue implementing sound fiscal policy and structural reforms in accordance with their "contractual obligations", making these two new instruments intrinsically linked and mutually reinforcing. | Status unknown. |
| Establish an increasing degree of "common decision-making on national budgets" and an "enhanced coordination of economic policies". A subject to "enhanced coordination", could in example be the specific taxation and employment policies implemented by the National Job Plan of each Member State . | Status unknown. |
In June 2015, a follow-up report entitled "Completing Europe's Economic and Monetary Union" (often referred to as the "Five Presidents Report") was issued by the presidents of the Council, European Commission, ECB, Eurogroup and European Parliament. The report outlined a roadmap for further deepening of the EMU, meant to ensure a smooth functioning of the currency union and to allow the member states to be better prepared for adjusting to global challenges:[20]
The European Commission has published a green paper describing how they envisage to build a new Capital Markets Union (CMU),[21] and will publish a more concrete action plan for how to achieve it in September 2015. The CMU is envisaged to include all 28 EU Members and to be fully build by 2019. Its construction will:
(A) Improve access to financing for all businesses across Europe and investment projects, in particular start-ups, SMEs and long-term projects.
(B) Increase and diversify the sources of funding from investors in the EU and all over the world, so that companies (including SMEs) in addition to the already available bank credit lending also can tap capital markets through alternative funding sources that better suits them.
(C) Make the capital markets work more effectively by connecting investors and those who need funding more efficiently, both within Member States and cross-border.
(D) Make the capital markets more shock resilient by pooling cross-border private risk-sharing through a deepening integration of bond and equity markets, hereby also protecting it better against the risk for systemic shocks in the national financial sector.
The establishment of the CMU, is envisaged at the same time to require a strengthening of the available tools to manage systemic risks of financial players prudently (macro-prudential toolkit), and a strengthening of the supervisory framework for financial actors to ensure their solidity and that they have sufficient risk management structures in place (ultimately leading to the launch of a new single European capital markets supervisor). A harmonized taxation scheme for capital market activities, could also play an important role in terms of providing a neutral treatment for different but comparable activities and investments across jurisdictions. A genuine CMU is envisaged also to require update of EU legislation in the following four areas: (A) Simplification of prospectus requirements; (B) Reviving the EU market for high quality securitisation; (C) Greater harmonisation of accounting and auditing practices; (D) Addressing the most important bottlenecks preventing the integration of capital markets in areas like insolvency law, company law, property rights and the legal enforceability of cross-border claims.
All of the above three stages are envisaged to bring further progress on all four dimensions of the EMU:[20]
The Historical Archives of the European Central Bank published the minutes, reports and transcripts of the Committee for the Study of Economic and Monetary Union ('Delors Committee') in March 2020.[22]