1. Ece DINCASLAN
Econonomic and Monetary Union
Which factors explain the creation of the EMU?
The European economic and monetary union (EMU) is widely viewed as one of the most
important developments in recent European integration. The idea of an economic and
monetary union in Europe started well before the Treaties establishing the European
Communities after the Second World War. The reasons for the creation of EMU have been
widely discussed; some focus on the request for political integration that would have resulted
from an EMU, some claim that the EMU was established to promote growth and investment.
The project will hence discuss how the creation of EMU was both an economic and politically
driven process.
The European Monetary System (EMS) was the pioneer of Economic and Monetary Union
(EMU), which led to the establishment of the Euro. It was a way of creating an area of
currency stability throughout the European Community by encouraging countries to co-
ordinate their monetary policies. It used an Exchange Rate Mechanism (ERM) to create stable
exchange rates in order to improve trade between EU member states and hence help the
development of the single market. Stable money had been a key part of international
economic calculations since World War II. However, by the 1980s, opinion about it was much
more divided. As a result, not all countries took part in the EMS directly, and there were
sharper cleavage in the years to come over the role of the EU in setting monetary policy as the
EMS was replaced with the Euro.
The EMS was launched in 1979 to help lead to the ultimate goal of EMU that had been set
out in the Werner Report (1970). Since World War II, attempts had been made to maintain
currency stability amongst major currencies through a system of fixed exchange rates called
the Bretton Woods System. This collapsed in the early 1970s. However, European leaders
were maintain the principle of stable exchange rates rather than moving to the policy of
floating exchange rates that was gaining popularity in the USA. This led them to create the
EMS. Yet it was not an entirely successful move because, first, it posed many technical
difficulties in setting the correct rate for all member states, and secondly, some members were
less committed to it than others. Britain didn't join the ERM until 1990 and was forced to
leave it in 1992 because it could not keep within the exchange rate limits. The project,
however, continued: under the Maastricht Treaty (1992), the EMS became part of the wider
project for EMU that was developed during the 1990s. When the Euro came into being in
1999, EMS was effectively wound up, although the ERM remained in operation.
The EMS came about because of the high global inflation and economic stagnation that
characterized much of the 1970s. Contributing greatly to these problems was the sorry
financial predicament of the United States during this decade. The dollar, which served as a
peg for European currencies, was plagued by a ballooning American deficit, the oil crisis, a
rapid rise in the demand for gold in world commodity markets, and unemployment and
"stagflation" at home. The currency exchange rates of European Community (EC) members
fluctuated wildly against the dollar which the Nixon administration, because of domestic
demands, refused to devalue. As a result the central banks of most western European
countries, in an effort to stabilize their own currencies, were unable to continue buying these
inflationary dollars. This led to increased speculation against the dollar, driving its value
down even further. EC members were increasingly uneasy about this financial morass and

2. gave birth to the EMS out of fear that these monetary problems would derail plans for
European economic integration.
In 1978 the European Council, which then was the principal policy making organ of the
EC, agreed to establish the EMS. Its purpose was twofold: stabilize the currency exchange
rates of participating countries and protect each member's currency from the fluctuating dollar
and other perceived weaknesses in American fiscal policy. Participating initially were
Belgium, Denmark, France, Ireland, Italy, Luxembourg, the Netherlands, and West Germany.
Spain became a full participating member in 1989 as did the United Kingdom in 1990.
Portugal and Greece are members but do not participate fully. The EMS had its antecedent in
the Werner Report of 1970 and the so-called "snake system" initiated in 1972. The Werner
Report proposed a gradual ten-year move towards an economic union focusing on a single
unit of currency and a single monetary policy. The European currency "snake" was an
agreement whereby participating EC members agreed to manage their respective currency
exchange rates so that they fluctuated with each other within a narrow prescribed band or
"snake" of plus or minus 2.5 percent.
EMS is an "asymmetrical" system that is dominated by the conservative monetary
priorities of Germany and its independent central bank (the Bundesbank). Under the rules of
the EMS, Germany, because it has Europe's strongest economy and most stable currency,
basically determines European monetary policies. This asymmetry of the EMS has brought
charges of German hegemony and has been the source of considerable resentment among
other EC countries. In particular, France has chafed under the restrictions of German
monetary dominance. A key moment came in 1983, when the Socialist government of
François Mitterrand was forced to abandon its expansionary economic program in order to
remain within the EMS. Since this point, establishing control over German monetary policy
through the creation of supranational monetary institutions has been a central objective of the
French government.1
By the middle of 1989, the discussion of European monetary union was already well
underway. The growing political instability in Eastern Europe, however, culminating in the
dramatic opening of the Berlin Wall on 9 November, placed the issue of monetary union in a
wholly new context. Concern about the power and orientation of a united Germany led many
European leaders to espouse a strengthening or deepening of EC institutions; this, it was
believed, would serve to permanently bind Germany to the Community, thus preventing a
more independent or nationalistic course in the future. October 1989 argued that the
construction of a federal Europe was "the only satisfactory and acceptable response to the
German question."' 2
The British government under Prime Minister Thatcher argued against EC deepening, and
instead gave priority to widening the Community to incorporate new members. There was
also the traditional British reluctance to surrender further aspects of national sovereignty to
supranational institutions, since rapid expansion of the Community would favor its evolution
into a looser confederation of independent states rather than a more unified federal Europe.
Another important motivation for Britain, however, was fear of German power. According to
Thatcher and in direct contrast to the French position, a tightly integrated EC would be more
easily dominated by Germany than would a broader grouping of sovereign states3
1
Michael J. Baun, The Maastricht Treaty as High Politics: Germany, France, and European Integration, 607
2
The Economist, 21 October 1989, 50
3
Michael J. Baun, The Maastricht Treaty as High Politics: Germany, France, and European Integration, 624

3. Britain entered the ERM in 1990 at a rate of 2.95 Deutschmarks to one Pound Sterling.
Many feel this rate was too high and caused Britain's rapid departure from the system. What’s
more; Britain dramatically left the ERM on 16 September 1992 (a day that became known as
Black Wednesday), because it was no longer possible to keep the pound within the bands of
the ERM.
German unification and the end of cold war have considerably altered the dynamics of
European integration. In a new and more unstable postcold war context, it is to be expected
that considerations of national security and position will once again come to dominate
European and EC politics. To be sure, this new balance-of-power game will be played out
within the context of established European and supranational institutions, thus mitigating its
potential negative consequences. Nevertheless, as a result of its high politics nature, European
integration after the cold war will become increasingly problematic and more highly
politicized.
The Single European Act and the Delors Report (1989)
The Single European Act (17.2.1986) enshrined in law some of the major economic
preconditions for ‘fair and loyal’ competition and long-term stability within the internal
market. It introduced a new article in the EEC Treaty concerning EMU and co-operation
between Member States in this field, with special reference to the EMS and the development
of the European Currency Unit (ECU).
It also created a European Currency Unit (ECU) to be used as a unit of account. Although
not a real currency, the ECU became the basis for the idea of creating a single currency - an
idea that was realised with the launch of the Euro in 1999.
The debate on EMU was fully re-launched at the Hannover Summit in June 1988, asking
an ‘ad hoc Committee’ of the Central Bank Governors of the twelve Member States, chaired
by the President of the Commission, Jacques Delors, to propose a new timetable with clear,
practical, realistic steps for creating an economic and monetary union. The report on EMU in
the European Community drafted by the Delors Committee was presented to the public in
April 1989. The report’s recommendations were reached unanimously. It favoured the
approach of making substantial steps towards economic convergence, price stability and
budgetary discipline before irrevocably fixing the exchange rates between the currencies in a
monetary union.
This article has argued that the Maastricht Treaty was essentially a political response by
the EC and its member countries to German unification and the end of the cold war. In
particular, it represents a bargain between the Community's two most important countries,
Germany and France, each of whom viewed the agreement as a means of securing vital
national interests. For Germany, the treaty was necessary to assuage the fears of its EC
partners about a more independent united Germany and to convince them of its unflagging
commitment to the Community and European integration. For France, an agreement on
monetary union was a means of integrating Germany even more firmly into European

4. institutions and structures and of retaining some degree of leverage and control over its
powerful neighbor. The leaders of both countries also regarded the maintenance of positive
bilateral relations as a crucial objective, and the Maastricht Treaty was viewed as a means for
preserving the Franco-German axis of European cooperation in the post-cold war era. In the
final analysis, the Maastricht Treaty was a mechanism by which German unification and
European integration could be reconciled and made compatible.
The Way to Go the Maastricht Summit
Accepting the ‘Delors report’ as a useful basis for further work on EMU, the Madrid
European Council decided in June 1989 to begin the process of creating a single currency
with the first stage starting on 1 July 1990. In Strasbourg in December 1989, the European
Council agreed to convene an Intergovernmental Conference (IGC) on EMU before the end of
1990, in particular to make the necessary changes to the treaty for an economic and monetary
union.
The Maastricht Summit and Its Outcome ‘9/10 December 1991’
One possible explanation of the treaty, focusing on the core agreement on monetary union,
a second explanation can be derived from neofunctionalist theories of European integration,
which have enjoyed a resurgence of academic interest in recent years; this basically explains
the agreement on monetary union as an inevitable outgrowth, or spillover effect, of the
dynamic of economic integration unleashed by the Community's single-market project
(Europe 1992) in the 1 9 8 0 and it does in fact have important roots in economic and
institutional developments prior to 1989, must be understood primarily as a political response
by EC countries to German unification and the end of the cold war. In particular, it represents
a political bargain between the EC's two most important members, Germany and France, each
of whom viewed the agreement as a means of securing vital national interests. 4
The Maastricht Treaty, therefore, can be understood as an exercise in high politics, with the
primary motivations of the key players being broad considerations of national security and
advantage rather than technical solutions to domestic economic and social problems (low
politics). It was signed by the Heads of State or Government in May. However, it only came
into force on 1 November 1993. This delay was due to difficulties in the ratification process in
some Member States, in particular due to the need for a second referendum in Denmark.
With the "Treaty of Maastricht", the Member States confirmed their political will to realise
an Economic and Monetary Union, although exceptions were made for Denmark and the
United Kingdom in terms of when they would join it. In parallel, in economic and financial
circles there was a growing conviction that a European Union with a single currency might be
more resistant to economic and monetary crises.
The most important feature of the EMS is the exchange rate mechanism (ERM) which, like
the "snake," keeps each member's respective currency within a prescribed range of
fluctuation. The hoped-for range was plus or minus 2.25 percent. Those currencies that were
floated were allowed to fluctuate as much as plus or minus 6 percent but only on a temporary
4
Michael J. Baun, The Maastricht Treaty as High Politics: Germany, France, and European Integration, 605-606

5. basis. In 1993, however, the band of fluctuation was temporarily increased to plus or minus
15 percent as a response to currency speculation pressure. In order to stabilize these exchange
rates there is an obligatory intervention procedure. Central banks of countries having stronger
currencies are obliged to "intervene" or buy weaker currencies whose value has fallen below
the prescribed range or band. Likewise, the central banks of countries having the weaker
currencies are obliged to sell their currencies to the central banks of financially stronger
countries.
A central feature of the EMS is a common unit of currency. Created in 1974 it was initially
called the European unit of account but soon became known as the European currency unit
(ECU). The unit was backed by pooling specified amounts of member nations' currency. The
amount of currency deposited by each member country was related to the economic strength
of that country. In 1990 30 percent of the ECU pool or basket was in deutsche marks, 19
percent in French francs, 12 percent in pound sterling, and 10 percent in Italian lira. The
balance of the basket came from the remaining EMS participants. The ECU represented a
stable unit of exchange and could be used in commercial transactions. Key concepts here are:
excessive deficit procedure, prohibition of privileged access, prohibition on the central banks
granting credit facilities to public authorities and undertakings, broad economic policy
guidelines and convergence criteria.
In 1995 the European Council, which consists of the heads of state of the EC's 12
members, renamed the ECU the "euro." Although the acronym "ECU" made sense as an
English term, it had no basis of meaning in any other European language. Germany proposed
the term" euro" be combined with the name of each national currency as a suffix. In this case
the new unit of exchange could be known as the "euromark," "euro-franc," "euro-lira," etc.,
but ultimately, the simpler "euro" was selected.
The most important part of EMS was the Exchange Rate Mechanism. This committed all
member states' governments to keep their currency exchange rates within bands. This meant
that no country's exchange rate could fluctuate more than 2.25% from a central point. This
was designed to help create stable commerce without the fear that sudden changes in the
values of currencies would dampen trade and encourage the development of trading barriers
between member states.
There are arguments which are support and criticize Economic and Monetary Union;
For;
 The European Monetary System was important in ensuring currency stability in the
European Community at a time when international markets were very volatile.
 Without the EMS the completion of the single market project would have been more
difficult.
Against;
 Fixing exchange rates is dangerous because unless the correct rate is set and changed
appropriately, a national economy can be forced to pursue policies that are not best
suited to domestic conditions simply in order to maintain international stability.
 EMS established the principle that one monetary policy can suit all member states.
The events of 1992 proved that this was not the case.

6. To sum up; although concerns about the EMU center around loss of national
sovereignty for each of the individual participating states and some fear that the
participating states may not be able to pull out of a national economic crisis without the
ability to devalue its national currency and encourage exports, there are more benefits to
be a member of EMU. Moreover; the use of the common euro eliminates the currency
exchange fees from the cost of doing business between the European states. Higher
productivity growth, increased labour utilisation, and improved competitiveness in the
global economy. Companies will be able to quickly compare prices with their competitors,
which may encourage competition and may result in lower prices for consumers. By
encouraging stability and efficiency, proponents of the EMU hope that the use of the euro
will stimulate economic growth and may reduce the unemployment rates in the
participating member states. International investors will likely diversify their portfolios
with euros, encouraging more investment in the European continent. The European states
want the euro to become one of the premier currencies in the international financial
market, alongside the dollar and the yen.