The Euro and Economic and Monetary Union

01 October 2009
by inadim -- last modified 20 March 2014

All EU Member States form part of Economic and Monetary Union (EMU), which can be described as an advanced stage of economic integration based on a single market. It involves close co-ordination of economic and fiscal policies and, for those countries fulfilling certain conditions, a single monetary policy and a single currency – the euro.

The process of economic and monetary integration in the EU parallels the history of the Union itself. When the EU was founded in 1957, the Member States concentrated on building a 'common market'. However, over time it became clear that closer economic and monetary co-operation was desirable for the internal market to develop and flourish further. But the goal of achieving the EMU including a single currency was not enshrined until the 1992 Maastricht Treaty (Treaty on European Union), which set out the ground rules for its introduction. These state what the objectives of EMU are, who is responsible for what, and what conditions Member States must meet in order to adopt the euro. These conditions are known as the 'convergence criteria' (or 'Maastricht criteria') and include low and stable inflation, exchange rate stability and sound public finances.

Who manages the euro?

With the launch of the euro monetary policy became the responsibility of the independent European Central Bank (ECB), which was created for that purpose, and the national central banks of the Member States having adopted the euro. Together they compose the Eurosystem. Fiscal policy (public revenue and expenditure) remains in the hands of individual national authorities - although they undertake to adhere to commonly agreed rules on public finances known as the Stability and Growth Pact. Member States also retain overall responsibility for their structural policies (i.e. labour markets, pension and capital markets), but agree to co-ordinate them in order to achieve the common economic goals.

Who uses it?

The euro is the currency of the 333 million people who live in the 18 euro area countries. It is also used, either formally as legal tender or for practical purposes, by other countries such as close neighbours and former colonies. It is therefore not surprising that the euro has rapidly become the second most important international currency after the dollar.

Why do we need it?

Apart from making travelling easier within the EU, a single currency makes economic and political sense. The framework under which the euro is managed underpins its stability, contributes to low inflation and encourages sound public finances. A single currency is also a logical complement to the single market and contributes to making it more efficient. Using a common currency increases price transparency, eliminates currency exchange costs, facilitates international trade and gives the EU a more powerful voice in the world. The size and strength of the euro area also better protect it from external economic shocks, such as unexpected oil price rises or turbulence in the currency markets. Last but not least, the euro gives the EU's citizens a tangible symbol of their European identity.

Against the background of the current debt crisis important measures to improve the economic governance in the EU and the euro area in particular have been taken. EU Member States have strengthened the Stability and Growth Pact, introduced a new mechanism to prevent or correct macroeconomic imbalances and are increasingly coordinating structural policies. These are crucial steps to strengthen the "E" - the economic leg - of the EMU and to ensure the success of the euro in the long run.

Source: European Commission