European Monetary Union
Introduction
After nearly a decade of control in global monetary affairs, the dollar faced stiff competition with the creation of the Euro. National symbolism and political calculations undoubtedly serve a critical role in shaping the current debates. The international status of the Euro promoted significant implications for the global monetary system, the exchange rates, the composition of portfolios, and monetary policy. The introduction of the Euro meant that European nations entered unchartered waters. The EU introduced the Euro in 1999, culminating in the production of physical Euro coins and paper notes in 2002 (Llewellyn 129). The Euro represented the national currency of the EU member states. They tasked the European Central Bank with the mandate of preserving the value of the currency and maintain the stability of price in the EU. In line with that, this paper provides a candid discussion of the euro arrangement along with the costs and benefits that may come with the currency using the debt crisis of several EU member countries.
The European Monetary Union Arrangement
Economic and monetary union is an outcome of broadminded economic integration in the European Union. The framework represents the expansion of the EU single market with common regulation of products and free movement of goods, labor, and capital. To that end, the introduction of the Euro that is the common currency that comprises 19 EU Member States, served to fulfill the convergence criteria. The European Monetary Union (EMU) emerged as the latest stage in a historical process that started following the collapse of the Bretton Woods system in the 1970s. As Klein writes, the dollar-centered Bretton Woods system that commenced after the Second World War made currencies of all leading industrial nations to have a fixed price in terms of the US dollar, which had a fixed rate of $35 per ounce of gold (5). The rise of unemployment and the progressive current account deficit of the US worked against the Bretton Woods system. In reaction, the US monetary policy became increasingly expansionary that contradicted the fixed exchange rate agreement, given that the EU member states did not opt to follow the US’s lead toward increased inflation.
A more inclusive approach to an exchange rate system for Europe, the European Monetary System started in March 1979. The EMU, as Sadeh and Amy define it, is a system of policies that manage budget and facilitates the admission of new members into the EU (287). To that end, EMU is understood as a process of Europeanization with the euro zone as a set of institutions that political factors manipulate and construct strategies. The member states of the EU are required to provide a proportion of money to the EMU that is channeled to international trade, border protection, environmental protection, promotion of human rights, and rural development. Equally, the EMU arrangement requires that the money acts as an aid to members in the event of financial and economic crisis. A good example is Greece that the EU gave financial assistance to help the member country repay the debt as well as recover from a recession. At the point when new member states join the EU, the EMU contributes to the 3-stage process that leads to the financial contribution, and implementation of the Euro currency (Llewellyn 136).
Costs and Benefits of EMU
The literature reviewing the costs and benefits of EMU has concentrated on the economic effects of a common currency. From the financial perspective, the question has been whether the EMU represents a political marriage based on convenience or a financially sound match established in Brussels. Proponents of the Euro currency have cited the ease of trade in assets and goods over the European zone and the resultant economic efficiencies afforded by the common currency (Klein 10). On the reverse, distractors have been keen to voice their concerns that the related benefits come at the cost of duplicating monetary policy within individual states of the exchange zone. The associated cost is evident in the case of the US when labor moves from slumping regions to booming regions as well as when the federal fiscal transfer is made to states in recession.
Supporters of the EMU contend that the distractors fail to acknowledge the particular reasons for having a fixed exchange rate, and conventional currency is essential in the context of Europe. Historically speaking, flexible rates of exchange among the European currencies in the 1930s led to economic destabilization, given that countries pursued competitive devaluation policies (Klein 11). In addition to that, institutional factors, particularly the costs associated with the Common Agricultural Policy. The successful creation of a single European market coupled with the all-embracing trade connections within Europe supports the need for a common currency.
A dominant part of the debate associated with the costs of a common currency in Europe has emphasized the limits it would place on the national macroeconomic policy (Klein 11). The period of the European Monetary System offers a glowing demonstration of the theoretical maxim, in which the use of a fixed exchange rate means that member states must choose between the national determination of fiscal policy and the free international capital movement. In the wake of market pressure against the Euro currency, the Central Bank committed to the extrinsic objectives of the fixed exchange rate has to raise domestic rates of interest. Thus, this would happen at the expense of the internal aim of setting interest rates with an intention toward economic conditions at the national levels. To that end, the only approach to maintain fiscal independence is either through allowing the currency to float or to put controls on the international capital movement.
In the initial years of implementation of the EMS, the member states opted to adopt a sovereign financial policy as well as fixed exchange rates, forgoing the internal mobility of capital. According to Klein, capital controls protected the EMS member nations from speculative shocks on their currencies (12). Yet, movements of capital at the international level provide beneficial gains, and so, EMS subscribers liberalized capital markets in a bid to realize these gains. The result was a potential increase in the destabilizing speculative attack. Given the new currency, member states chose to route of a free flow of money along with fixed exchange rates, at the expense of independent monetary policy. After some years, the pull to pieces of capital controls in 1987, the administration endured as the fiscal policy objectives appeared to be consistent across the members of the ERM. Nevertheless, the arrangement unraveled when Germany opted for an independent anti-inflation goal at the time when unemployment in other nations made easier fiscal policy politically appropriate (Portes & Helene 328). Thus, similar to the Bretton Woods system, the center country in a fixed exchange rate organization determined to pursue a set of domestic fiscal objectives as opposed to set policy compatible with the smooth performance of the system of the exchange rate.
The case of German issues with the subjugation to the demands of the Euro currency alongside forgoing self-determination of fiscal policy continues to date. The country remains in favor of the EMU; the members of other government branches have expressed their concerns.
Debates in the press sometimes hint that the EMU may provide a framework for a new reserve currency to replace the dollar. The demise of the dollar as a reserve currency was predictable, especially after the decline in value in 1995 (Delors 45). As with the case with the US single currency, the Euro would take time to establish a full membership in the EMU. The incidences of low inflation and the robust growth of the US economy will serve to support the role of the dollar as the global reserve currency. In regard to these shores, the establishment of the EMU could help strengthen economies by ensuring intra-European price comparisons increasingly transparent, reducing costs of the transaction, and economic policy promotion.
Conclusion
Scholars of the European Monetary Union appear to disregard the idea that Germany remains the regional hegemonic power. Yet, the creation of EMU, and possibly the tenacity of the members to sustain it, requires a collective continental approach to explain the need to limit the destabilizing effect of foreign and US economic policies. In other words, the ugly transatlantic relations are, the more sustainable the EMU becomes. In the same token, EMU could represent an attempt to regain hegemonic power or pool sovereignty, leading to an increase in the influence of Europe in the internal stage (Llewellyn 131). The critical question for Europe relates to whether the period of the move to a single currency becomes an increasingly stable and unstable time of speculative attacks. Overall, the Euro’s economic viability depends on the smooth transition, and its success is essential for improved economic progress in the region. However, failure would result in remarkable economic and fiscal consequences and hostile political implications.