European Economic and Monetary Union (EMU)

What is the European Economic and Monetary Union (EMU)?

The European Economic and Monetary Union (EMU) integrates the economies of the 19 European Union (EU) member states through a group of economic and monetary policies. All the EU states are in the economic union, but not all are in the monetary union, i.e., Bulgaria, Poland, Denmark, and the UK. EMU was launched in 1992 to improve economic stability and provide strong and sustainable growth in the region.

Understanding the Economic and Monetary Union (EMU)

The Economic and Monetary Union is a step that the EU took to further integrate the economic markets of the member states. The EMU countries coordinate their economic and fiscal policymaking initiatives and share a common monetary policy with a common currency – the euro.

The fiscal policies are coordinated mainly through government deficit and debt limitations under the Stability and Growth Pact (SGP). According to the SGP, government deficits must be limited to below 3% of GDP, and government debts must be less than 60% of GDP.

The monetary policy and euro are managed by the European Central Bank (ECB) and national central banks, with a medium-term inflation target of close to but below 2% across the eurozone. The 2% inflation rate is considered to be optimal for economic growth and employment rate.

The monetary policy decision-making is independent of outside influence. The countries that are members of the EU but not within the eurozone coordinate their monetary policy with the ECB.

Organizational Structure of EMU

There are seven major actors responsible for the economic governance in the EMU as listed below:

1. The European Council is responsible for setting the policy orientations.
2. The Council of the EU (a.k.a. the Council) negotiates and adopts EU laws, as well as coordinates policies together with the European Parliament.
3. The Eurogroup coordinates the policy of currency and the common interest across the eurozone member states.
4. The Member States set their own budgets and structure policies while following the coordinated deficit and debt limits.
5. The European Commission is responsible for performance and compliance monitoring.
6. The ECB is the central supervisor of the financial institutions within the eurozone. As mentioned above, it sets the monetary policy with the primary objective of price stability.
7. The European Parliament formulate legislation and establish budgets together with the Council. It is also responsible for the democratic scrutiny of all EU institutions.

Under the monetary and fiscal policies coordinated, adopted, and monitored by the institutions, the EMU facilitates the member states with economic stability and a more effective single market.

History of the European Economic and Monetary Union (EMU)

The EU started to dream about establishing a system with a common economic policy and currency in the late 1960s. However, it’s been a complex process to develop such a system. The history of EMU can be divided into three stages, starting from 1990.

The first stage was from 1990 to 1993. During the initial stage, the completion of the EMU was officially set as a formal objective with a group of economic convergence criteria regarding the inflation rate, interest rate, and exchange rate.

At the second stage, from 1994 to 1998, details of the new currency – the euro – were set. The European Monetary Institute was established to manage the cooperation of monetary policy across the national banks of member states. The role of the institute was then taken over by ECB later. The SGP was also established and adopted at this stage.

The third stage started in 1999, with the official launch of the euro and a common monetary policy. Greece, Slovenia, Cyprus, Malta, Slovakia, and other European countries started to join the EMU.

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