What is the European Monetary Union (EMU)?

Published by Thomas Herold in Banking, Economics, Laws & Regulations, Trading

'European Monetary Union (EMU)' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The European Monetary Union is also known by its long-time acronym of EMU. The full name of this is the European Economic and Monetary Union. This refers to the succeeding protocol to the original EMS European Monetary System. It means the combining of European Union member nations into a frame work for a centralized economic policy set and system. The most visible and greatest representation of this union is the euro currency, which has become the national currency for more than half the EU member states.

It was via a three-staged process that the EMU succeeded the EMS. The final third phase included the adopting of the euro currency which replaced the long-time national currencies such as the franc, peso, and mark. It was successfully concluded by all of the original EU members besides Denmark and the United Kingdom. Both of these countries received opts-outs from taking on the euro in place of their beloved sovereign national currencies.

The real history of such an economic and monetary union began with the French Foreign Minister Robert Schuman’s speech, which became known as the Schuman Declaration on May 9th of 1950. He reasoned that the one sure way to ensure the peace lasted in Europe that had suffered from devastating world wars two times in only thirty years was to craft Europe into one single economic polity. It was his landmark speech that gave rise to the Treaty of Paris in 1951. This actually forged the ECSC European Coal and Steel Community betwixt signatories Germany, Italy, France, Belgium. Luxembourg, and the Netherlands.

This original treaty strengthened through the subsequent Treaties of Rome that led to the creation of the EEC European Economic Community. Next came the Treaty of Paris that lasted through 2002. In the 1960s and 1970s, the politicians across Europe adopted the Werner Plan, yet later economic disruptions including the Saudi oil embargo and break down of the Bretton Woods agreement meant that they could not merge economically any further at this point.

The Maastrict Treaty of 1992 created a literal timeline to establish the European Monetary Union. By 1998, they had successfully formed the ECB European Central Bank which established conversion rates that were fixed between all of the member state currencies. This led to the rise of the euro single currency that started physically circulating in 2002.

Yet there were hidden flaw in the EMU design. Greece became the first severe example of these. It was revealed by 2009 that Greece had been intentionally under reporting the amount of its severe budget deficits it ran since they started using the Euro in 2001. As a result, the nation experienced what amounts to the most serious economic crisis in modern history. The proud country had no choice but to agree to two painful bailout and austerity packages from the EU and ECB in only five years. Continued bailouts remained essential to Greece being able to repay its massive debts to its many creditors.

The unemployment rate in Greece rose to as high as 25 percent (in general) and 50 percent (for people less than 25 years old). The county’s government was forced to instill capital controls to prevent monetary flight and also launch a bank holiday to limit the amounts of euros which depositors could withdraw from the banking system in any given day. The only way out of their still ongoing crisis would be to leave the EMU and return to their ancient currency the Drachma. This would allow them to severely devalue their currency and increase the competitiveness of their exports abroad.

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The term 'European Monetary Union (EMU)' is included in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.