Example research essay topic: Following The Development Of The Economic And Monetary Union – 1,908 words

The Economic and Monetary Union (EMU) is a single
currency area within the European Union in which
people, goods, services and capital move without
restriction. Imperative to the success of the EMU
is the implementation of a single European
currency, the Euro, and the application of
specific macro-economic policies by the EMU member
states. Moreover, it is the foreseeable intent of
European governments to create a framework for
stability, peace and prosperity through the
promotion of structural change and regional
development. This paper will endeavor to highlight
the fundamental gains likely to be accrued by the
European business community as a result of EMU
policy provisions. The developments and
circumstances preceding the EMU formation will be
examined to give insight into the functioning of a
monetary union. Furthermore, it is essential to
analyze the implications the EMU has for firms
within both the European Union (Euroland) and
other European nations.

To establish a strong
understanding of the intricacies of the EMU, it is
essential to discuss both the antecedents and
major developments in this monetary union. The
origins of the EMU can be traced to the formation
of the European Coal and Steel community (ECSC) in
the early 1950s, which was the first attempt to
harness European economic unity to achieve greater
international competitiveness (Per Jacobson,
1999). The success of this venture prompted the
foreign ministers of six ECSC nations to examine
the possibility of further economic integration
Hence, in 1957 one the most significant agreements
in European economics history, The Treaty of Rome,
was signed. The Treaty of Romes fundamental goal
was to provide for the creation of a common market
(Kenwood & Lougheed, 1999). The most
significant aspect of this treaty was the
commitment made by such countries as Belgium,
France, West Germany, the Netherlands, Italy and
Luxembourg to facilitate the free movement of
goods, services and factors of production.
Essentially, these European governments sought to
eliminate internal trade barriers, create common
external tariffs and harmonies member states laws
and regulations (Hill, 2001). This movement
towards a common European market continued with
relative success until the late 1960s.

During this
period, the Bretton-Woods Exchange Rate Regime had
begun to exhibit unmistakable flaws, whilst global
inflation was alarming high. In addition, the
revaluation of the German Deustchemark and the
devaluation of the French Franc, created
considerable exchange rate volatility within
Europe (Barber, 1999). It was a common held belief
amongst many member states, that Europes ability
to compete within the global economy hinged on the
introduction of a single currency. Hence, in 1970
the Werner Committee was established to resolve
the most efficient means to converge economic
performance and currencies (Harris, 1999). The
Werner Report proposed a three-stage process for
achieving a complete monetary union within a
decade. The final goal would be the free movement
of capital, the permanent locking of exchange
rates and the eventual replacement of the EC6
nations notes and coins with a single currency
(Barber, 1999).

The committee proposed a complete
European Monetary Union by 1980, however the
failure of the Smithsonian Agreement, the
subsequent introduction of a floating exchange
rate regime and the infamous Oil Price Shocks of
the 70s, caused the plans outlined by the Werner
Committee to be abandoned (Harris, 1999). In
retrospect, the endeavors of the EMU were bold
considering the erratic economic climate of the
1970s. Yet, even in this period of economic
uncertainty, EC members still pursued the concept
of European Unity (Princeton Economics, 1998). In
1979, the European Monetary System (EMS) was
established to foster a greater stability between
member states currencies and stronger coordination
and convergence of economic policies. The EMS
consisted of four main components, the European
Currency Unit (ECU), The Exchange Rate Mechanism
(ERM), The Financial Support Mechanism (FSM) and
the European Monetary Cooperation Fund (EMCF)
(Harris, 1999). The ERM was at the heart of the
EMS and provided for fixed but adjustable exchange
rates between countries, whereby currencies could
move within certain margins or fluctuations.

When
limits were breached the responsible authorities
were required to impose appropriate policy
measures (Europa Quest, 2001). The EMS enjoyed
considerable success during the 1980s, lowering
inflation rates in the EC and easing the adverse
financial effects of the global exchange rate
fluctuations (Harris, 1999). The most problematic
aspect of the EMS was that it held no true
sovereignty over member states, rather these
countries still maintained autonomy over
currencies and macro-economic policies (Harris,
1999). To rectify this systems inadequacy, Jacques
Delors, the President of the European Commission,
issued the Cockfield Report, which sought to
define the current status of the European markets
and establish the correct means for implementing a
monetary union (Chulalongkorn University, 1999).
Undertaking a concerted and structured attempt at
implementing a single currency was imperative.
(Harris, 1999). In 1987, the Single European Act
was passed, based upon the recommendations
outlined in the Cockfield Report (Chulalongkorn
University, 1999). This paper outlined a
comprehensive program of 282 measures to be
implemented to achieve a single market and the
timetable, which must be adhered to ensure the
actions success (Harris, 1999).

The Single
European Act intended to have a single market in
place by 1993. It proposed the removal of all
frontier controls between EC countries, the
application of the principle of mutual recognition
to product standards and open public procurement
to non-national suppliers. In addition, the Act
purported the need to lift barriers in the ECs
retail banking and insurance industry and the
elimination of restrictions on foreign exchange
transactions (Hill, 2001). Pivotal to the Single
European Acts implementation was the substantial
surrender by member states of their economic
autonomy to the European System of Central Banks
(ESCB). The ESCB would assume responsibility for
coordinating macro-economic policies. Essentially,
it was the primary role of the ESCB to fix
internal exchange rates to the single currency,
the Euro, control foreign reserves, interest and
inflation rates (Harris, 1999).

This actual
movement of the EC towards a single currency, was
hampered by the failure of the Delors Report to
establish the economic standards which the EC
member states must achieve in order to ensure
convergence into one business cycle (Barber,
1999). In 1993, The Treaty of Maastricht expanded
upon the Single European Act, primarily
establishing a timetable for the implementation of
the single currency and most significantly the
convergence criteria to be reached by those
nations ascending into the EMU (Princeton
Economics, 1998). The Maastricht Convergence
Criteria is an essential element of the EMU
structure, as it sets five minimum economics
requirements, which must be met in order to ensure
membership (JP Morgan, 2001). An ascending
countrys inflation must be no higher than 1.5%
above the average for the three EU members with
lowest rates during the previous year, indicating
price stability must exists within an economy. A
prospective EMU member state should also
experience long run interest rates no higher than
2% above the three EU members with the lowest
rates during the previous year. The exchange rates
of each economy must have also been in the normal
band of the ERM for 2 years without devaluating.
Those considering imminent membership should also
display fiscal prudence or rather the economy
should not experience a budget deficit, which
exceeds 3% of its GDP.

Finally, it is essential
that national debt does not exceed 60% of GDP (JP
Morgan, 2001). These strict economic standards
ensure that all countries operating under the
single currency could be brought to the same
position of the business cycle. If all member
nations are experiencing similar economic
conditions, it is possible for the ESCB to
prescribe uniform monetary and discretionary
fiscal policy (Urken, 1997). The final agreement
which of consequence to the development of the
EMU, is the establishment of the Stability and
Growth Pact (Harris, 1999). This arrangement was
initiated in 1996 at the Dublin Summit of the
European Council, establishing a set of rules
relating to currency and budgetary disciplines for
countries within Euroland. Essentially, this
policy pact decrees that all EMU members must
maintain the Maastricht Criteria and defines
possible enforcement mechanisms (Salmon, 2000).
Specifically, the Stability and Growth Pact states
those conditions under which EMU members have the
right to exceed the set public debt to GDP ratio.
Should authorization not be granted, member states
make a mandatory deposit, which shall be
transformable into a fine 2 years later (Per
Jacobson, 1999).

The Treaty of Maastricht also
outlined the timetable of events, which has made
the single currency fully operational as of
February 2002. From January 1999, the Euro became
the official currency the EMU, which ensured from
that point forward all foreign exchange operations
and new public debt was issued in Euros. On
January 1st 2002, Euro coins and banknotes went
into circulation and in March 2002 the EMU
authorities canceled national currencies as a
means of exchange. The development of the EMU has
indeed been a long and involved process spanning
more than 50 years, yet it will undeniably yield
benefits for business within Euroland and have
considerable implications for the business
communities in other European nations. The
Eurozone business community is likely to
accumulate a number of benefits from the
implementation of the EMU, making the lengthy
nature of its development rather lucrative. The
EMU facilitates the movement of goods, services,
people and capital through the development of a
single European currency and the removal of
barriers to intra-community trade (Roubini, 1997).
Essentially, European businesses are being given
the opportunity to exploit the liberalization of
cross-border controls, which had previously
diminished their ability to trade within Europe
(Harris, 1999).

European firms will find it easier
to access the 12 Eurozone markets, creating an
opportunity to introduce new or modified products
for each member states, or alternatively to
provide a standardized set of goods and services
for Euroland (Harris, 1999). The EMUs development
also facilitates those companies who seek to
derive the competitive advantage of factors of
production inherent in some member states (Hill,
2001:133). The greater movement of capital and
labor allows firms to establish different aspect
of their business operations throughout the
Eurozone such as research and development in
Germany, with production in Spain. The commitment
of the EMU authorities to lowering transport cost
specifically the abolition of restrictions on
import taxes, allows Euroland firms to develop
more efficient channel to distribute goods and
services throughout Europe (Duisenberg, 1998).
Financial markets have also undergone considerable
liberalization throughout the EMU evolution,
resulting in the removal of barriers, which had
limited cross-border borrowing. This commitment to
reducing financial barriers, will ensure Eurozone
firms have inexpensive access to finance in all
EMU member states (Duisenberg, 1998). The
culmination of greater product choice, increased
movements of factors of production, enhanced
channels of distribution and a more liberalized
financial market, guarantees Eurozone firms will
be operating in a highly dynamic, challenging and
ever-expanding marketplace.

Inevitably, this will
stimulate the EMU to become a highly competitive
economic community. Currently, intra-community
trade accounts 60% of member states international
exchanges, a figure which is likely to grow with
the success of the EMU (de Silguy, 1997). It is
foreseeable that initially Euroland firms may
suffer under the pressure of such intense
competition, however long run efficiency gains are
likely to develop amongst EMU firms ensuring their
longevity (Salvatore, 1998:283). The development
of the EMU and the subsequent removal of exchange
rate, trade and administrative barriers, will
enourage firms to seek strategic alliances and
join ventures (Harris, 1999:84). Moreover, it is
expected the union of firms could facilitate the
sharing of intellectual property, research and
development, capital and labour techniques,
creating greater operational efficiency and
improving both the firms competitiveness within
the Eurozone and international markets (Antweller,
2001). It was a common held opinion amongst
European business leaders, that political and
economic integration was necessary to ensure to
ability of European f ….

Research essay sample on Following The Development Of The Economic And Monetary Union