The EMS and the Euro

The EMS and the Euro
Adopted by the Treaty on European Union of 1992 (The Maastricht Treaty)
EMU designates the zone of countries within the EU
which share the same monetary policy and currency the euro.
EMU: the three stages
Stage 1: July 1, 1990 - 31 December 31, 1993
Featured the removal of remaining restrictions on the free movement of capital and
an increased focus on economic convergence.
Stage 2: January 1,1994 - December 31, 1998
The main preparations for EMU are made: the foundation of the ECB and the
Stage 3: starting with January 1, 1999
The euro becomes a legal currency and the national currencies of 11 participating
countries became subdivisions of it.
Transition period
Jan. 1, 1999 - Dec. 31, 2001
January 1,1999: the euro became the EU's single currency,
December 31, 2001: the day before euro notes and coins are
released and national currency starts to be withdrawn from
The transition period was needed to allow time to print the 13
billion bank notes and 52 billion euro coins that will go into
E-Day: January 1, 2002
Euros bank notes and coins go into circulation
Withdrawal of national notes and coins
Countries participating in the euro zone have agreed to
try to withdraw the bulk of their national notes and coins
by the end of February 2002
The common European face was designed by Luc
Luycx, a 39-year-old computer scientist at the Belgian
Royal Mint.
He won ECU 24, 000 for his prize-winning series of
Economic convergence
For monetary union to function properly, it was necessary for
the economies of the founding Member States to be
converging, i.e. performing along broadly similar lines.
Economic convergence is judged based on convergence
Convergence criteria
These are the economic tests used to judge whether countries
are ready to participate in monetary union:
• inflation - within 1.5% of best three performing countries in
terms of price stability;
• public finances - absence of an excessive government
deficit and debt (see below);
• exchange rate stability, - observance of the normal margins
of the exchange rate mechanism without severe tensions or
devaluation for 2 years;
• long term interest rates - within 2% of rates in the three
countries with lowest rates of inflation
No bail out clause
The European Union is not liable for the commitments of a
Member State.
A country cannot be bailed out by a transfer of funds.
It must accept sanctions imposed by the financial markets.
Who is in charge of the monetary policy?
The European System of Central Banks
The European Central Bank and the national central banks
The European Central Bank
Formally constituted on 1 June 1998, the ECB is part of the
European System of Central Banks together with the EU's 15
national central banks.
ECB basic tasks:
- defining and implementing monetary policy for the euro area
- conducting foreign exchange operations
- holding and managing the official foreign reserves of the Member States
Coordination of economic policies
The introduction of the euro has required stronger
procedures for coordinating national economic policies.
In June of each year, the European Council sets annual
broad economic policy guidelines following a
recommendation from the Commission and discussion
among Finance Ministers.
If national policies deviate from the agreed guidelines,
the Council may publish specific recommendations on
corrective measures that are necessary.
Price convergence
The euro may lead to a narrowing of price differences
for the same product between Member States because
of the ease with which prices can be compared in the
single currency in the single market.
In 1999, price dispersion averaged 16% in Europe,
compared to 11% in the US.
Map of the Euro area

similar documents