EMU 101

European Economic and Monetary Union, abbreviated as EMU by abbreviationfinder, was built according to the Maastricht Treaty in three stages to be realized close form of integration within the EU. A monetary union is generally characterized by an unrestricted, irreversible convertibility of currencies, a complete liberalization of capital movements and the integration of the banking and financial markets as well as an elimination of exchange rate ranges and the irrevocable fixing of exchange rate parities. An economic union is broader. The basic element is a uniform market with free movement of people, goods, services and capital (European internal market). It also includes a common competition policy and other measures to strengthen market mechanisms, a common policy for structural adjustment and regional development and, ultimately, the coordination of key areas of economic policy (including binding rules for budgetary policy).

European Economic and Monetary Union: conversion rates

Stages of EMU: The focus of the first stage of EMU (started on July 1, 1990) was the lifting of capital controls within the EC and closer cooperation in the economic policy of the member states.

European Economic and Monetary Union: Convergence Situation Hide table

The establishment of the European Monetary Institute (EMI) as the forerunner of the European Central Bank (ECB) was one of the most important measures in the context of the second stage (started on January 1, 1994). The EMI was concerned with the immediate technical and procedural preparation of the monetary union, while responsibility for monetary policy remained at the national level in this phase. With the beginning of the second stage, during which the economic, fiscal and monetary convergence of the member states was intensified, there was a fundamental ban on financing public deficits through the national central banks. In addition, the mandatory requirement of the autonomy of the national central banks had to be complied with.

With the entry into the third stage on January 1, 1999, responsibility for the common monetary policy in the currency area of ​​the new single currency euro (€) was transferred to the European System of Central Banks (ESCB), also known as the Eurosystem. Previously, in May 1998, the heads of state and government of the EU member states initially had eleven participating countries (Eurozone) set; Denmark, Greece, Great Britain and Sweden were not there from the start. The ECB was officially founded on June 1, 1998, on December 31, 1998 the final conversion rates of the national currencies to the euro required for the irrevocable fixing of the exchange rates of the participating countries, and in January 1999 the European payment system TARGET was put into operation. While the national currencies were replaced by the euro as early as January 1, 1999 in payment transactions between banks and non-banks, euro banknotes and coins were not issued until January 1, 2002. Until then, the national currencies retained their function as legal tender, however, they only functioned as sub-units of the euro. From the beginning of 1999 there were therefore no longer any official exchange rates between the national currencies of the euro area and with third countries. On January 1, 2002, the euro finally replaced the national currencies as the sole legal tender. However, the national central banks are still obliged to convert old money into euros at any time and free of charge. The conversion of all money stocks (credit, debts), money flows (e.g. income, Rents) and prices took place at the official conversion rates (in Germany at the rate of 1.95583 DM for 1 €). In some areas there were not inconsiderable price increases.

Convergence criteria: Participation in the European Monetary Union (EMU) was – and will continue to be for new members in the future – dependent on the fulfillment of the convergence criteria defined in the Maastricht Treaty:

• Price level stability: The average inflation rate in the year before the entry test may be a maximum of 1.5 percentage points above that of the three most stable countries.
• Participation in the EMS exchange rate mechanism, subject to the normal range, must last at least two years; in particular, the national currency must not have been devalued during this period on the initiative of the candidate country.
• In the course of one year prior to the convergence test, the long-term nominal interest rate may not exceed that of the three countries with the lowest inflation rates by more than 2 percentage points.
• The annual budget deficit must not exceed 3% of gross domestic product (GDP), unless the rate has declined significantly and continuously and is close to the reference value.
• The government debt-to-GDP ratio must not exceed 60% unless the rate is falling sufficiently and is approaching the reference value.

As early as September 1996, the finance ministers and central bank presidents of the EU countries had agreed on a stability and growth pact to ensure compliance with the convergence criteria even after the start of EMU, as well as on a new, more flexible exchange rate mechanism between the euro and the currencies of the countries that did not immediately join the Can participate in EMU (EMS II; European Monetary System), agreed.

The advantages of EMU include, in particular, the elimination of exchange rate risks and currency-related transaction and exchange rate hedging costs, increased planning security for investments and the elimination of exchange rate-related distortions of competition.