What are the Problems and Possibilities of Economic Monetary Union?

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What are the Problems and Possibilities of Economic Monetary Union?

European Monetary Union (EMU) was first introduced in 1969 at a summit of the European Economic Community in The Hague, the members arranged to endeavour and reduce the fluctuations in their currencies in order to coordinate national policies.  (McCormick).  Jacques Delores, in 1989 as the president of the Commission decided to introduce a 3 stage plan designed to increase the movement towards EMU, the plan attempts to fix exchange rates and introduce a single currency, the Euro.  This plan was not completed until 2002 when the Euro coins and notes began circulating.  In order for members of the European Union to join the Euro they were subject to convergence criteria, which confined the levels of government debt and national debt, inflation rates, exchange rates and interest rates the member country is allowed to have.  Converging to these criteria and adopting the Euro has provided many different outcomes, some of which are negative and other which will benefit the economies of the member countries.  This essay shall examine the problems and possibilities of European Monetary Union in order to determine whether EMU is beneficial to all that have taken part, and to discover where Economic Monetary Union is headed.  

In order to be part of the Economic Monetary Union, the member countries adopted the Euro as their currency and became part of the Euro Zone.  This increased the power both economically and politically for the European Union, as there are gains in prestige and political power associated with a common monetary policy.(Tsoukalis)  The European Union is now compared relatively with America as a large economic power with a single currency; this makes trading with the rest of the world easier as it will “increase the relative political weight of the countries involved with EMU”(p12).  The EU can use this new power to become more confrontational in world affairs.  

Implementation of Economic Monetary Union means an end to competitive devaluation, as the Euro is used and every country has the same currency there will be no exchange of currency between the member states, this results in the “loss of exchange rate as a policy instrument at national level” (p175).  This restricts the ability of a country to use devaluation as an economic policy, enabling the country to revive an economy, when it is in recession.  This represents a loss of flexibility within economic policies and so, “without devaluation, differences in competitiveness must be balanced either by falls in living standards, if labour markets are flexible and permit wages to fall in response to a decline in the demand for labour, or by unemployment.” (p323).  Competitive devaluation is also prevented, as devaluation can be inflationary, this will help to stabilise the economies within the Eurozone and reduce the uncertainty that surrounds devaluation of other currencies in order to remain competitive.  The loss of competitive devaluation, however, is mainly a negative effect, which will cause problems for the European Union if any of the member countries experience recessions or economic downturns in the future.  

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A main problem with European Monetary Union within the European Union is that the EU is not an optimal currency area.  “An ‘optimal’ currency area would have a high degree of cross-border mobility of capital and labour; it would have high wages and price flexibility” (p306) as defined by Jones.  The EU’s labour and capital markets are to inflexible to cope with the economic shocks and strains put on them by EMU.  Workers within the EU are reluctant to migrate to areas with employment in other member states; this leads to the rigidity of the market.   As there are ...

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4/5 This essay is informative and well-researched. At my institution (a Russell Group politics department) it would probably receive a 2.1, depending on the syllabus and the level of study). What prevents this from attaining a better mark is the lack of an overriding structure that facilitates a strong, and internally unified, argument. The points are made in a bit of a scattergun fashion so I didn't get the impression that costs and benefits were particularly well summed against each other. Indeed, in many cases the good and bad facets of EMU's design are paradoxical aspects of each other, particularly if the political consideration of who benefits is taken into account. The author touches upon these kinds of ideas, but foregrounding them would provide a stronger framework for the author's research and arguments.