The EMS and the Euro

EMUAdopted 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.

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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 legislation.

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 periodJan. 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December 31, 2001: the day before euro notes and coins are released and national currency starts to be withdrawn from circulation.

The transition period was needed to allow time to print the 13 billion bank notes and 52 billion euro coins that will go into circulation

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

België/Belgique Deutschland Ellas

España France Ireland

Italia Luxembourg Nederland

Österreich Portugal Suomi

Trivia

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 design

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 criteria.

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

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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

http://www.ecb.eu/bc/intro/html/map.en.html