European Economic and Monetary Union (EMU) Essay

1080 WordsJan 25, 20085 Pages
<BR> <br>On January 1, 1999 11 countries agreed that 2002 would mark the year that the Euro replaces the national currencies. Here we have another year for an absolute. By 2002 a single currency will exist in all the EMU countries. This is defined as the third and final stage of the EMU. <br> <br>The roots of the Economic and Monetary Union go back to the Treaty of Rome. Although the treaty was vague on monetary policy and had few binding constraints in macroeconomic policy, articles 104-109, now 102 to 130 contain a section called “Balance of Payments” and establishes the Monetary Committee to “Keep under review the monetary and financial situation.” This committee consists of two representatives from each member state and the commission. A chair was elected by the membership. <br> <br>There was very little interest at this time in establishing a single currency bloc. The book gives several reasons for this: <br>1. The Breton Woods system was the reigning idea of the time <br>2. The U.S. dollar was the undisputed standard <br>3. Keynesianism was the popular idea of the time and local governments wanted control over their fiscal and monetary policies. <br> <br>The need for a supranational monetary system became realized during the 1960’s with increased instability throughout Europe in regards to the vagaries of the U.S. dollar. France was especially hit by this and did not want to take on the U.S. alone in these matters. The Breton Woods system promised stability through a controlled exchange rate mechanism. This system was referred to as a ‘snake’ metaphorically since it was a temporary system that could shed its skin and change, or grow by being added to, but mainly because it was a system of linked exchange rates. During the 1960’s there was a long period of exchange rate stability, which brought a false sense

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