Policy Debate: Will the European Monetary
Issues and Background
The introduction of the euro... has clear economic advantages. It removes the
uncertainty over exchange rates from a large part of Europe.... It increases the transparency of
the European market, which makes it easier to benefit from economies of scale, but - or rather, in
addition - it encourages competition. The European System of Central Banks will also try to
bring about price stability over a large area which, if successful, will be an important condition
for a sustainable, real (i.e., actual) growth in income and employment. The economic advantages
of EMU [European Monetary Union] increase in proportion to the size and stability of the euro region.
~ Willem F. Duisenberg
The ultimate irony, of course, is that the attempt to bind the European countries
together in an artificial currency straight-jacket without political unity and common political
will is bound to result in the exact opposite of what its founders intended: It will lead to a
situation where individual national leaders will blame their economic and financial problems
on the monetary straight-jacket forced upon them. One can well envision a situation in which
Spanish leaders will claim that unemployment is so high because the European Central Bank's
monetary policy is too tight, while at the same time Germany's leaders will blame the central
bank for too high an inflation rate. This is not a recipe for monetary, economic and political
~ Robert Heller
Most of the countries in Europe are participating in a bold economic experiment in
which national currencies will be replaced by a common currency (called the Euro) by the year
2002. In May 1998, decisions were made on which countries were eligible for participation
in the European Monetary Union. A European Central Bank was created in 1998 that
is charged with coordinating monetary policy for the EU. Since January 1, 1999, the Euro
has been used for all foreign exchange operations in the participating countries. Euro
banknotes and coins will begin to circulate on January 1, 2002 and will completely replace
national currencies by July 1, 2002 (existing national currencies will cease to be legal tender
in the participating countries on or before this date).
Supporters of the European Monetary Union argue that the introduction of a common currency
will reduce transaction costs and increase the volume of trade among the participating countries.
This results in larger gains from trade and increases the extent of competition in most product markets.
Tourists will also benefit from the lower transaction costs associated with a single currency.
The introduction of a single European currency, however, also means that the participation countries will
no longer be able to pursue independent monetary and fiscal policies. Monetary policy for the
EU will be under the control of the European Central Bank. One of the major concerns
about the success of the monetary union is whether this central bank will be able to maintain
an independent policy of maintaining a low inflation target. While each country has some
control over its own fiscal policy, the ability to engage in deficit spending is limited since
the monetary union shares a common interest rate. Higher levels of government borrowing in one
country raise interest rates in all participating countries. Countries that maintain deficits
that exceed a specified value will be subject to sanctions. This may require countries to engage
in procyclical fiscal policies during a recession (i.e., increasing taxes and/or reducing government
spending or transfer payments to reduce a deficit).
One of the shortcomings of the European Monetary Union is that four members of
the European Union (Britain, Denmark, Greece, and Sweden) have chosen to not participate in the
European Monetary Union. (British Prime Minister Tony Blair, however, has made several statements suggesting that his government
would support Britain's entry into the European Monetary Union.) The Maastricht Treaty that
governs the process of formulating the monetary union imposes severe restrictions on inflation
rates, deficits, and debt/GDP ratios that must be satisfied for a country to be admitted to the
monetary union. While most countries have made substantial progress in reducing inflation rates over
the past few years, the deficits and debt levels in many of the countries wishing to participate in
the monetary union exceed the Maastricht limits. The success of the monetary union is likely to be
affected by the number of countries willing and able to participate.
Primary Resources and Data
- European Union
The home page of the European Union (EU) contains press releases, links to institutions and
agencies of the EU, and information about current and future activities of the EU. In particular,
this site contains information on economic
and monetary policy of the EU.
- Euro Page
The European Union's Euro page contains detailed information about the process of introducing
a common currency. This site contains a calendar listing critical dates in the process, a
description of the currency, press releases, speeches, and other information about the
- European Monetary Institute
The European Monetary Institute's web site contains online copies of the convergence report (required
under the Maastricht Treaty), press releases, speeches, and other information dealing with the
formation of the European Monetary Union.
- The Euro: Europe's New Currency
This page, provided by the Pacific Exchange Rate Service and maintained by Werner Antweiler,
contains a large amount of information on the process of converting to a single European currency. An extensive
list of links to relevant resources is also provided on this page.
- Geert Desmet's EURO page
This page contains a good deal of information on the status of the European Monetary Union.
(A fun feature is a countdown clock stating the time to the introduction of the EURO and the introduction
of EURO paper money.) An extensive collection of links to related sites is also provided on this site.
- EMU - Euro FAQ
This Euro FAQ (frequently asked questions), provided by Patrick O'Beirne, contains substantial information
on the European Monetary Union. An extensive collection of links to relevant web sites is also
provided at this site.
The EmuNet site provides articles and links to web-based information about the European
Monetary Union. This site is a good source for information dealing with political and economic
issues related to the EMU.
- The UK and the Euro
This web site (provided by EmuNet) contains links to current news articles dealing with the relationship between the
United Kingdom and the European Monetary Union.
- Treaty on European Union
This site contains the full text of the Maastricht Treaty forming the European Union.
- Deutsche Bank Research, "Euroland"
Deutsche Bank, Germany's central bank, provides this page containing links to numerous studies
concerning the process of formation of the European Monetary Union. (The Adobe acrobat viewer
plugin is required to view these studies. You may download this viewer by clicking
here.) (A growing number of links on this page now require
- Prometheus-Europe Discussion Paper, "Five Comments on Monetary Union"
Prometheus-Europe is a nonprofit association that supports European integration. This document
contains 5 studies dealing with the benefits and costs associated with the European Monetary Union (one
document is in French).
- Willem F. Duisenberg, Transcript of January 7, 1999 Press Conference
Willem F. Duisenberg, the first President of the European Central Bank, discusses the
introduction of the euro in this January 7, 1999 press conference. In his discussion, Duisenberg
also discusses the policy plans of the European Central Bank. A question and answer session
follows his presentation.
- Captain Euro
Captain Euro is a comic book character created to help provide information about the euro.
This site contains multimedia comic strip episodes, links
to sources of information about the Euro, and an online currency convertor. To use all of the
features of this site, you must have the free Shockwave plugin installed in your browser.
Different Perspectives in the Debate
- Willem F. Duisenberg, "The Euro and the Process of European Integration"
Willem F. Duisenberg was the President of the European Monetary Institute and is now serving
as the first President of the European Central Bank. In this March 5, 1998 speech, he discusses
the monetary union's role in the process of European economic integration. Duisenberg argues that
there are significant political and economic advantages resulting from this process. He also
discusses the role that must be played by the European Central Bank in maintaining a low and
stable inflation rate.
- Yves-Thibault de Silguy, "The Impact of the Creation of the Euro on Financial Markets and the International Monetary System"
This speech by Yves-Thibault de Silguy suggests that the Euro will play an important role as an international
reserve currency. He suggests that the Euro will help to create a multipolar international monetary system that may
be more stable than the current international monetary system.
- Association for the Monetary Union of Europe
Among the materials on this web site are: monthly newsletters on
the status of the European Monetary Union, a
document that describes the EMU and provides a description of expected advantages, and
a collection of 10 online articles that constitute the
Report of the AMUE working group on Sustainability of the Euro and the Convergence Criteria.
(To view the articles comprising the sustainability report, the Adobe acrobat viewer plugin is required. You may download this viewer by clicking
- Valéry Giscard d'Estaing, "Economic and Monetary Union: The Making of a New Currency"
In this April 10, 1997 speech, Valéry Giscard d'Estaing provides a history of the
European Monetary Union and discusses the advantages of this system. As part of his discussion,
he suggests that some of the Maastricht treaty convergence criteria should be relaxed to allow more
countries to participate in the monetary union.
- Perry Urken, "German Politics and EMU Convergence"
In this article, Perry Urken argues that the slow process of macroeconomic convergence required
under the Maastricht Treaty was primarily the result of German domestic politics. Urken argues that
a more rapid transition to a monetary union would have been a more efficient process and would have resulted
in fewer adjustment costs in those economies experiencing higher inflation rates.
- Martin A. Armstrong, "Understanding the Euro"
In this Princeton Economic Institute online article, Martin A. Armstrong argues that the
European Monetary Union is likely to be unsuccessful unless individual countries give up their control
over fiscal policy. He notes that it is likely that bond markets will place different values on bonds
issued by different countries, resulting in interest rate differentials that will not be eliminated
by the existence of a single currency.
- Euromoney Online, "SS Euro - sinking the unsinkable"
This online article discusses some of the problems that can cause the demise of the
European Monetary Union. A few of the problems discussed in this article:
(Visitors to this site are asked by the provider to register for free access to the Euromoney Online site.
- the Maastricht treaty has no provision for dealing with the exit of one or more countries
from the monetary union (nor does it contain an expulsion provision),
- concerns that a country may be forced to depart from the treaty as a result of high unemployment
will cause a risk premium to develop for that country's bond issues,
- possible computer problems caused by the year 2000 may disrupt some of the participating countries
and induce economic and financial instability,
- the European Central Bank may be either too weak or may be subject to political pressure that
would result in excessive inflation,
- a severe European recession (or localized recessions in one or more of the participating
countries) may lead to pressure to disband the monetary union.
- Robert Heller, "The Euro - The Wrong Solution at the Wrong Time"
In this document, Robert Heller, a former Federal Reserve Board Governor, discusses his concerns about the
success of the European Monetary Union. He argues that that a monetary union could only be successful
if there is a high degree of political consensus exists among the participating countries. In the past, only
relatively small countries have been willing to give up control over their monetary
policy. Heller suggests that the attempts to meet the Maastricht Treaty requirements have resulted in
high levels of unemployment and low rates of economic growth in the participating countries.
He also notes that the existence and widespread use of credit cards and high-speed computers have
already substantially reduced the transactions costs associated with international transactions.
This reduces the potential benefits from the adoption of a single currency.
- Robert Solomon, "International Effects of the Euro"
In this January 1999 Brookings Institution Policy Brief, Robert Solomon discusses the likely
effects of the introduction of the euro on international trade. He argues that the volume of trade
among the participating countries is likely to increase with the introduction of a common currency.
Solomon believes that the Euro will become an international reserve currency only gradually.