The Emu and the Euro

The movement towards the European Monetary Union and the creation of the euro lasted many years, complete with key personalities and major governmental treaties. When finally organized and implemented, it lead to a historical event that will forever change international economics. Of course with a change this tremendous comes the good and the bad, but if the economic welfare of the people is improved, everything was worth all the hassle.

HISTORY OF THE MOVEMENT

The beginnings of the movement for European monetary unification go back at least to the founding of the Organization for European Economic Cooperation (which then became the Organization for Economic Cooperation and Development, or OECD) in 1948. One of the OECC’s first accomplishments was the European Payments Union, established in 1950 and accomplished by the end of 1958, where the nations of Western Europe put their international reserves together and coordinated their policies with the intent of reestablishing current account convertibility.

In 1962 the Commission of the European Communities produced its first plan for a monetary union, which included a deadline for completion of nine years. Obviously, this deadline was a little overambitious for a group of countries whose only collective achievements had been the European Coal and Steel Community, an atomic energy community (Euratom), a customs union (the European Economic Community), and the Common Agricultural Policy of farm-product subsidization. The only accomplishment of the 1962 effort was a Committee of Central Bank Governors which was set up in 1964 but did not actually operate until the 1970s.

At the Hague Summit in 1969, European governments delegated a committee headed by Pierre Werner, then Prime Minister of Luxembourg, to devise a new plan. The Werner Report, finished in 1970, called for monetary unification within ten years. The plan scheduled a transition to happen in stages. In the first stage, exchange rate fluctuations would be limited, and governments would start to integrate their monetary and fiscal policies. In the second stage, exchange rate variability and price discrepancies would be further reduced. In the third stage, exchange rates would be fixed permanently, capital controls removed, and an European Community(EC) system of central banks (somewhat modeled on the U.S. Federal Reserve System) would take control of the monetary policies of the member nations. The size of the EC budget would be greatly increased and the EC would coordinate national tax and spending programs. The makers of the Werner Report were not attached to a single currency. Parts of the Werner Report were put into use in 1972 when EC countries made an agreement dubbed “the Snake” limiting bilateral exchange rate movements to 2 ј percent bands. Policy union and coordination was a bit slow. When the first OPEC oil shock caused different levels of unemployment in different European countries, national governments were under various levels of pressure to respond in ways that risked inflation. Some of the nations’ currencies were devalued and some revalued. The arrangement proved to be incapable of accomplishing the exchange rate stability that the makers originally hoped for.

This realization lead to another round of exchange rate stabilization negotiations at the Bremen Summit of 1978, leading to the creation of the European Monetary System(EMS) in 1979. Its goal was to stabilize exchange rates without simultaneously requiring the elimination of international policy divergences either through the use of fiscal and monetary rules or by empowering the EC to coordinate national policies. Its central element, the Exchange Rate Mechanism (ERM), was designed to accommodate the different policies pursued in different countries.

The EMS had been functioning for seven years when the EC installed the Single European Act in 1986. It basically laid out the basic provisions for what would be the European Union’s goals, organization, and some of its economic law. This committed the EC members to the creation of an integrated market without obstacles to the movement of goods, capital, and labor by the end of 1992. With the process of European economic integration gaining momentum, in 1988 the European Council appointed Jacques Delors, President of the

European Commission, to study the feasibility of supplementing the single market with a monetary union.

There were significant differences between the Werner Report and the Delors Report. Where the Werner Report recommended removing capital controls at the end of the process, Delors endorsed the beginning. Also, Delors did not propose transferring control of national budgetary policies to the European Community. Another difference is that the Delors Report included a new entity, the European Central