BBC Politics 97

EMU Jargon Explained

Economic and Monetary Union (EMU)

Economic and Monetary Union (EMU) means a single monetary policy within a single economic market, and is seen by its supporters as a logical complement to the single market.

A further development, though not strictly a necessary condition for a monetary union, would be the introduction of a common currency. The supply of the common currency would be determined centrally. This centralised control would determine one set of interest rates for the union as a whole, one of exchange rates with third countries and one of exchange controls. It is possible to have just one common currency, or to continue to use the national currency in parallel with the common currency.

In monetary union, member states' currencies should be fully convertible and capital transactions should be completely liberalised. Any margin of fluctuation around the fixed exchange rates would have to be eliminated and the rates would be irrevocably fixed.

This implies a high degree of convergence in the economic and monetary policies of the member states and the transfer of significant national powers to a Community economic and monetary authority.

The establishment of Economic and Monetary Union has been a European Community objective since 1969 (Final communiqué of the Conference of Heads of State or Government held in the Hague, in December 1969). This has since been restated on numerous occasions:

The Werner Report, October 1970.
The Final communiqué of the 1972 Paris Summit.
Conclusions of the presidency of the European Council in December 1977 and incorporated in the Treaty of Rome in article 102a of the Single European Act ratified in 1987.
A more detailed plan of the road to a single currency was outlined in the Treaty on European Union which came into force in November 1993.

ECU and the Euro

The ECU or European Currency Unit is a composite currency - a basket of currencies. It is made up of specific amounts of all the member states' currencies, according to a country's share of collective Gross National Product and its share of collective trade. The ECU also acts as the denominator of Community transactions.

The decision was taken at the Madrid European Council that the single currency unit should be called the Euro, so the ECU will cease to exist on the 1st January 1999 when the Euro will become a currency in its own right.

The Treaty on European Union (TEU) or 'Maastricht treaty' was agreed at Maastricht in December 1991, signed in February 1992 and came into force in November 1993. It sets out a fixed timetable for implementation of a Single Currency by three progressive stages of an Economic and Monetary Union ending in the establishment of the Single Currency.

In stage one, which started in July 1990, member states should have taken all necessary measures to realise the free movement of capital. They also should have ensured the economic convergence necessary for EMU, in particular with regard to price stability and public finances.

In stage two, member states should avoid excessive government deficits and reinforce the independence of its central banks. At the start of the second stage (1 January 1994), the European Monetary Institute was established. Its major task is to strengthen the co-ordination of monetary policies with a view to ensuring price stability.

In stage three, which starts on 1 January 1999, the governments of the member states will appoint the President, the Vice President, and the other members of the executive board of the European Central Bank. At the start of the third stage, the Council will, acting unanimously on a proposal from the Commission, adopt the conversion rates at which their currencies will be irrevocably fixed. These are the rates at which the Euro will be substituted for these currencies, and the Euro will then become a currency in its own right. The Council will also take the other measures necessary for the rapid introduction of the Euro as the single currency.

The Treaty on European Union sets out the 'Maastricht criteria' - monetary convergence criteria which member states will be required to meet to be a part of the single currency. The following extract from the TEU describes the 'Maastricht criteria':

"The achievement of a high degree of price stability; this will be apparent from a rate of inflation which is close to that of, at most, the three best performing Member States in terms of price stability; (Note: strict interpretation translates this to mean that inflation rates must fluctuate within 1.5% of the average of the three best performing countries.)

"The sustainability of the government financial position; this will be apparent from having achieved a government budgetary position without a deficit that is excessive as determined in accordance with Article 104c(6); (Note: strict interpretation translates this to mean that planned government deficit must not be more than 3% of GDP and gross debt must be no more than 60% of GDP.)

"The observance of the normal fluctuation margins provided for by the exchange rate mechanism of the European Monetary System, for at least two years, without devaluing against the currency of any other Member State;

"The durability of convergence achieved by the Member State and of its participation in the exchange-rate mechanism of the European Monetary system being reflected in the long-term interest-rate levels." (Note: strict interpretation translates this to mean that long term interest rates must fluctuate within 2% of bond yields of the three best performing countries.)

These criteria are deliberately loosely worded. Some EU countries will hope to use this leeway to enter a single currency without having strictly fulfilled the criteria in the eyes of other EU countries.

Treaty establishing the European Community (TEC)

The Treaty establishing the European Community was renamed as such by the Treaty on European Union which came into force in November 1993. Before this it was known as the Treaty of the European Economic Community. The EEC treaty and the Treaty of the European Atomic Energy Community were known as the Treaties of Rome. They were signed on 25 March 1957 and came into force on 1 January 1958. The six founder members were France, Germany, Italy, Belgium, the Netherlands and Luxembourg.

The objectives of the treaties were:

To take a first step towards a "European Federation".

To establish a common market based on the freedom of movement of goods, persons, capital and services.

To co-ordinate the research programmes already under way or being prepared in the member states.

The Treaties of Rome were revised by the Single European Act (agreed in 1984 and 1985, came into force in 1987) and then again by the Treaty on European Union (agreed in 1991, signed in 1992, came into force in 1993.)

The European Monetary Institute (EMI)

The European Monetary Institute is established under article 109f (1) of the Treaty establishing the European Community as amended by the Treaty on European Union. It began work on 1 January 1994. It is an embryonic European Central Bank and hence the tasks assigned to it are similar, although they are applied to the specific circumstances of the transitional second stage of EMU. The work of the EMI is outlined in the TEU extract below:

"The EMI, shall:

strengthen co-operation between the central banks of the Member States;

strengthen the co-ordination of the monetary policies of the Member States with the aim of ensuring price stability;

monitor the functioning of the European Monetary System

hold consultations concerning issues falling within the competence of the central banks and affecting the stability of financial institutions and markets;

take over the tasks of the European Monetary Co-operation Fund which shall cease to exist;

facilitate the use of the ECU and oversee the development, undertake functions with respect to the ECU clearing in the private markets, including the smooth functioning of the ECU clearing system.

For the preparation of the third stage the EMI shall:

prepare the instruments and the procedures necessary for carrying out a single monetary policy in stage three;
promote the harmonisation, where necessary, of the conditions governing the collection, compilation an distribution of statistics in the areas within its field of competence;
prepare the rules for operations to be undertaken by the national central banks in the framework of the ESCB (European System of Central Banks);
promote the efficiency of EC cross-border payments;
supervise the technical preparation of ECU banknotes."

Alexandre Lamfalussy was appointed president of the EMI by the Heads of state or government of the member states. The EMI is located in Frankfurt.

The European System of Central Banks (ECSB) will become operational on 1 January 1999. Its primary objective "shall be to maintain price stability". The ESCB is composed of the ECB and the central banks of the Member States. It is governed by the decision making bodies of the ECB which include the Governors of the national central banks.

The basic tasks to be carried out through the ESCB will be:

to define and implement the monetary policy of the Community;

to conduct foreign exchange operations consistent with the provisions of Article 109;

to hold and manage the official foreign reserves of the Member States;

to promote the smooth operation of payment systems;

to contribute to the smooth conduct of policies relating to the prudential supervision of credit institutions and the stability of the financial system.

The European Central Bank (ECB) will become operational on 1 January 1999. It "will be governed by a Governing Council composed of an Executive Board and the governors of the national central banks. The Executive Council will consist of six members drawn from "persons of standing and professional experience in monetary or banking matters...Their term of office shall be eight years and shall not be renewable." (TEU)

The ECB has the exclusive right to authorise the issue of bank notes within the Community. However, the ECB will share with the national central banks the actual role and process of issuing bank notes. Only notes issued by the ECB or the national central banks shall have the status of legal tender within the Community. Member State may issue coins subject to ECB approval of the volume.

Subject to certain provisos, the ECB must be consulted regarding "any proposed Community act within its field of competence" and "by national authorities regarding any draft legislative provision within its field of competence." (TEU).

The Madrid European Council/The Dublin European Council/(Heads of State/Government)

Every six months the European Heads of Government or state meet. The meeting is called the European Council and ia generally named after the city in which the meeting takes place. In December 1995, the Heads of state or Government met in Madrid - hence the Madrid European Council. In December 1996, the Heads of state or Government met in Dublin - Hence the Dublin European Council.

ECOFIN and Council of Ministers

Ministers with the same portfolio from each member state meet to pass European laws and the progress legislation. The meetings take place on a regular basis varying from once a month to once every year depending on how much business they have to discuss. This meeting is called the Council of Ministers. ECOFIN is the short hand name for the council of economic and financial ministers. The British Chancellor of the Exchequer attends ECOFIN meetings.

EU Member States

There are currently fifteen member states. They are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the UK.

The Commission

The Commission is the executive body of the EU. It has the right of initiative and is the "guardian of the Treaties".

The Commission is staffed by over 12,000 civil servants allocated between the twenty-four Directorates-General, or General Services like the translation department which is the largest of its kind in the World.

It is the Commission's duty to draft proposals for submission to the Council and the Parliament. The Commission adopts the draft proposals on a collegiate basis, which means that the proposals are endorsed by all its twenty Members to become a "Commission proposal to the Council" or "to the Council and Parliament".

Commissioners