Governing Europe

By Jack Hayward; Anand Menon | Go to book overview

19 Monetary Policy and the Euro

Loukas Tsoukalis

On 1 January 1999, eleven countries of the European Union (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain) entered the final stage of EMU, which subsequently led to the replacement of the national currencies by the euro. They were joined by Greece on 1 January 2001. On the other hand, the citizens of Denmark decided in a referendum held in September 2000 to stay out. As for Sweden and the United Kingdom, their participation in EMU will also depend on the outcome of referenda to be held in the future.

Money is at the heart of national sovereignty, the currency being a key symbol of nationhood, while monetary policy and the exchange rate constitute important instruments of economic policy. The EMU promises to be one of the most important events—arguably, the most important—in the history of European integration, with extensive economic and political ramifications. If anything, it could be compared to the common foreign and security policy (CFSP) of the Union. And we would then need to explain why monetary integration has reached the final (and irreversible?) stage, while the CFSP still remains more of a procedure than a policy.

Monetary integration in Europe has a long and chequered history, starting with the very cautious handling of monetary matters by the authors of the Treaty of Rome and ending with the complete transfer of power in the conduct of monetary policy to the European level. Money has always been highly political and it has also been frequently used as an instrument for wider political objectives, even though markets and economic fundamentals have not always obliged by adjusting themselves to the exigencies of high politics. It is likely to prove different this time round.

This chapter will trace briefly the history of European monetary integration. It will then examine the politics and economics of the Maastricht Treaty and EMU; the convergence criteria and the transition to the final stage; and the institutional structure provided for in the treaty. It will conclude with the main outstanding issues, drawing on the experience of the first two years of life with the euro, and the prospects for the future.


The Early History

The first twenty years after the establishment of the European Economic Community (EEC) in 1958 were characterized by much talk and little action as regards monetary

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