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The Economic and Monetary Union (EMU)
  Members of the Eurozone
  ERM-II-member with opt-out (Denmark)
  EU-member with opt-out (United Kingdom)
  The rest of the EU-members

The Economic and Monetary Union (EMU)[1] is an "umbrella term for the group of policies aimed at converging the economies of "member states of the European Union at three stages. The policies cover the 19 "eurozone states, as well as non-euro "European Union states.

Each stage of the EMU consists of progressively closer economic integration. Only once a state participates in the third stage it is permitted to adopt the "euro as its official currency. As such, the third stage is largely synonymous with the eurozone. The "euro convergence criteria are the set of requirements that needs to be fulfilled in order for a country to join the eurozone. An important element of this is participation for a minimum of two years in the "European Exchange Rate Mechanism ("ERM II"), in which candidate currencies demonstrate economic convergence by maintaining limited deviation from their target rate against the euro.

Nineteen EU member states, including most recently Lithuania, have entered the third stage and have adopted the euro as their currency. All new EU member states must commit to participate in the third stage in their treaties of accession. Only Denmark and the United Kingdom, whose EU membership predates the introduction of the euro, have legal "opt outs from the "EU Treaties granting them an exemption from this obligation. The remaining seven non-euro member states are obliged to enter the third stage once they comply with all convergence criteria.



"European Union
Flag of the European Union

This article is part of a series on the
"politics and government
of the European Union

The idea of an "economic and monetary union in Europe was first raised well before establishing the "European Communities. For example, the "Latin Monetary Union existed from 1865-1927.[2][3] In the "League of Nations, "Gustav Stresemann asked in 1929 for a European currency[4] against the background of an increased economic division due to a number of new nation states in Europe after World War I.

A first attempt to create an economic and monetary union between the members of the "European Communities goes back to an initiative by the "European Commission in 1969, which set out the need for "greater co-ordination of economic policies and monetary cooperation,"[5] which was followed by the decision of the Heads of State or Government at their summit meeting in "The Hague in 1969 to draw up a plan by stages with a view to creating an economic and monetary union by the end of the 1970s.

On the basis of various previous proposals, an expert group chaired by Luxembourg’s Prime Minister and Finance Minister, "Pierre Werner, presented in October 1970 the first commonly agreed blueprint to create an economic and monetary union in three stages (Werner plan). The project experienced serious setbacks from the crises arising from the non-convertibility of the US dollar into gold in August 1971 (i.e., the collapse of the "Bretton Woods System) and from rising oil prices in 1972. An attempt to limit the fluctations of European currencies, using a "snake in the tunnel, failed.

The debate on EMU was fully re-launched at the Hannover Summit in June 1988, when an ad hoc committee (Delors Committee) of the central bank governors of the twelve member states, chaired by the President of the "European Commission, "Jacques Delors, was asked to propose a new timetable with clear, practical and realistic steps for creating an economic and monetary union.[6] This way of working was derived from the "Spaak method.

The Delors report of 1989 set out a plan to introduce the EMU in three stages and it included the creation of institutions like the "European System of Central Banks (ESCB), which would become responsible for formulating and implementing monetary policy.[7]

The three stages for the implementation of the EMU were the following:

Stage One: 1 July 1990 to 31 December 1993[edit]

Stage Two: 1 January 1994 to 31 December 1998[edit]

Stage Three: 1 January 1999 and continuing[edit]


There have been debates as to whether the Eurozone countries constitute an "optimum currency area.[8]

There has also been a lot of doubt if all eurozone states really fulfilled a "high degree of sustainable convergence" as demanded by the Maastricht treaty as condition to join the Euro without getting into financial trouble later on.

Monetary policy inflexibility[edit]

Since membership of the eurozone establishes a single "monetary policy for the respective states, they can no longer use an isolated monetary policy, e.g. to increase their competitiveness at the cost of other eurozone members by "printing money and devalue, or to print money to finance excessive government deficits or pay interest on unsustainable high government debt levels. As a consequence, if member states do not manage their economy in a way that they can show a fiscal discipline (as they were obliged by the Maastricht treaty), they will sooner or later risk a sovereign debt crisis in their country without the possibility to print money as an easy way out. This is what happened to Greece, Ireland, Portugal, Cyprus, and Spain.[9]

Plans for reformed Economic and Monetary Union[edit]

Being of the opinion that the pure austerity course was not able to solve the Euro-crisis, French President "François Hollande reopened the debate about a reform of the architecture of the "Eurozone. The intensification of work on plans to complete the existing EMU in order to correct its economic errors and social upheavals soon introduced the keyword "genuine" EMU.[10] At the beginning of 2012, a proposed correction of the defective "Maastricht currency architecture comprising: introduction of a fiscal capacity of the "EU, common debt management and a completely integrated banking union, appeared unlikely to happen.[11] Additionally, there were widespread fears that a process of strengthening the Union's power to intervene in eurozone member states and to impose flexible labour markets and flexible wages, might constitute a serious threat to Social Europe.[12]

First EMU reform plan (2012-15)[edit]

In December 2012, at the height of the "European sovereign debt crisis, which revealed a number of weaknesses in the architecture of the EMU, a report entitled "Towards a genuine Economic and Monetary Union" was issued by the four presidents of the Council, European Commission, ECB and Eurogroup. The report outlined the following roadmap for implementing actions being required to ensure the stability and integrity of the EMU:[13]

Roadmap[13] Action plan[13] Status as of June 2015
Stage 1: Ensuring fiscal sustainability and breaking the costly link between banks and sovereigns
Framework for fiscal governance shall be completed through implementation of: "Six‑Pack, "Fiscal Compact, and "Two‑Pack. Point fully achieved through entry into force of the Six‑Pack in December 2011, Fiscal Compact in January 2013 and Two‑Pack in May 2013.
Establish a framework for systematic Ex Ante Coordination of major economic policy reforms (as per Article 11 of the "Treaty on Stability, Coordination and Governance). A pilot project was conducted in June 2014, which recommended the design of the yet to be developed Ex Ante Coordination (EAC) framework, should be complementary to the instruments already in use as part of the European Semester, and should be based on the principle of "voluntary participation and non-binding outcome". Meaning the end result of an EAC should not be a final dictate, but instead just an early delivered politically approved non-binding "advisory note" put forward to the national parliament, which then can be taken into consideration, as part of their process on improving and finalizing the design of their major economic reform in the making.[14]
Establish a "Single Supervisory Mechanism (SSM) as a first element of the "banking union, and ensure the proposed "Capital Requirements Directive and Regulation (CRD‑IV/CRR) will enter into force. This point was fully achieved, when CRD‑IV/CRR entered into force in July 2013 and SSM became operational in November 2014.
Agreement on the harmonisation of national resolution and deposit guarantee frameworks, so that the financial industry across all countries contribute appropriately under the same set of rules. This point has now been fully achieved, through the Bank Recovery and Resolution Directive (BRRD; Directive 2014/59/EU of 15 May 2014) which established a common harmonized framework for the recovery and resolution of credit institutions and investment firms found to be in danger of failing, and through the Deposit Guarantee Scheme Directive (DGSD; Directive 2014/49/EU of 16 April 2014) which regulates "deposit insurance in case of a bank's inability to pay its debts.
Establish a new operational framework under the auspice of the "European Stability Mechanism (ESM), for conducting "direct bank recapitalization" between the ESM rescue fund and a country-specific systemic bank in critical need, so that the general government of the country in which the beneficiary is situated won't be involved as a guaranteeing debtor on behalf of the bank. This proposed new instrument, would be contrary to the first framework made available by ESM for "bank recapitalizations" (utilized by Spain in 2012-13), which required the general government to step in as a guaranteeing debtor on behalf of its beneficiary banks - with the adverse impact of burdening their gross "debt-to-GDP ratio. ESM made the proposed "direct bank recapitalization" framework operational starting from December 2014, as a new novel ultimate backstop instrument for "systemic banks in their recovery/resolution phase, if such banks will be found in need to receive additional recapitalization funds after conducted bail-in by private creditors and regulated payment by the "Single Resolution Fund.[15]
Stage 2: Completing the integrated financial framework and promoting sound structural policies
Complete the banking union, by establishing the "Single Resolution Mechanism (SRM) as a common resolution authority and setting up the "Single Resolution Fund (SRF) as an appropriate financial backstop. SRM was established in January 2015, SRF is planned to start working from January 2016.
Establish a new "mechanism for stronger coordination, convergence and enforcement of structural policies based on arrangements of a contractual nature between Member States and EU institutions on the policies countries commit to undertake and on their implementation". The envisaged contractual arrangements "could be supported with temporary, targeted and flexible financial support", although if such support is granted it "should be treated separately from the multiannual financial framework". Status unknown.
(mentioned as part of stage 2 in the updated 2015 reform plan)
Stage 3: Improving the resilience of EMU through the creation of a shock-absorption function at the central level
(2015 and later)
"Establish a well-defined and limited fiscal capacity to improve the absorption of country-specific economic shocks, through an insurance system set up at the central level." Such fiscal capacity would reinforce the resilience of the eurozone, and is envisaged to be complementary to the "contractual arrangements" created in stage 2. The idea is to establish it as a built-in incentives-based system, so that eurozone Member States eligible for participation in this centralized asymmetrically working "economic shock-absorption function" are encouraged to continue implementing sound fiscal policy and structural reforms in accordance with their "contractual obligations", making these two new instruments intrinsically linked and mutually reinforcing. Status unknown.
(mentioned as part of stage 2 in the updated 2015 reform plan)
Establish an increasing degree of "common decision-making on national budgets" and an "enhanced coordination of economic policies". A subject to "enhanced coordination", could in example be the specific taxation and employment policies implemented by the National Job Plan of each Member State (published as part of their annual National Reform Programme). Status unknown.
(mentioned as part of stage 2 in the updated 2015 reform plan)

Second EMU reform plan (2015-25) : The Five President's Report[edit]

In June 2015, a follow-up report entitled "Completing Europe's Economic and Monetary Union" (often referred to as the ""Five Presidents Report") was issued by the presidents of the "Council, "European Commission, "ECB, "Eurogroup and "European Parliament. The report outlined a roadmap for further deepening of the EMU, meant to ensure a smooth functioning of the currency union and to allow the member states to be better prepared for adjusting to global challenges:[16]

  1. Deepening the Economic Union by ensuring a new boost to convergence, jobs and growth across the entire eurozone. This shall be achieved by:
  2. Complete construction of the "banking union. This shall be achieved by:
  3. Launch a new Capital Markets Union (CMU):
    The European Commission has published a "green paper describing how they envisage to build a new Capital Markets Union (CMU),[18] and will publish a more concrete action plan for how to achieve it in September 2015. The CMU is envisaged to include all 28 EU Members and to be fully build by 2019. Its construction will:
    (A) Improve access to financing for all businesses across Europe and investment projects, in particular start-ups, SMEs and long-term projects.
    (B) Increase and diversify the sources of funding from investors in the EU and all over the world, so that companies (including SMEs) in addition to the already available bank credit lending also can tap capital markets through alternative funding sources that better suits them.
    (C) Make the capital markets work more effectively by connecting investors and those who need funding more efficiently, both within Member States and cross-border.
    (D) Make the capital markets more shock resilient by pooling cross-border private risk-sharing through a deepening integration of bond and equity markets, herby also protecting it better against the risk for systemic shocks in the national financial sector.
    The establishment of the CMU, is envisaged at the same time to require a strengthening of the available tools to manage systemic risks of financial players prudently (macro-prudential toolkit), and a strengthening of the supervisory framework for financial actors to ensure their solidity and that they have sufficient risk management structures in place (ultimately leading to the launch of a new single European capital markets supervisor). A harmonized taxation scheme for capital market activities, could also play an important role in terms of providing a neutral treatment for different but comparable activities and investments across jurisdictions. A genuine CMU is envisaged also to require update of EU legislation in the following four areas: (A) Simplification of prospectus requirements; (B) Reviving the EU market for high quality securitisation; (C) Greater harmonisation of accounting and auditing practices; (D) Addressing the most important bottlenecks preventing the integration of capital markets in areas like insolvency law, company law, property rights and the legal enforceability of cross-border claims.
  4. Reinforce the "European Systemic Risk Board, so that it becomes capable of detecting risks to the financial sector as a whole.
  5. Launch a new advisory European Fiscal Board:
    This new independent advisory entity would coordinate and complement the work of the already established independent national fiscal advisory councils. The board would also provide a public and independent assessment, at European level, of how budgets – and their execution – perform against the economic objectives and recommendations set out in the EU fiscal framework. Its issued opinions and advice should feed into the decisions taken by the Commission in the context of the European Semester.
  6. Revamp the European Semester by reorganizing it to follow two consecutive stages. The first stage (stretching from November to February) shall be devoted to the eurozone as a whole, and the second stage (stretching from March to July) then subsequently feature a discussion of country specific issues.
  7. Strengthen parliamentary control as part of the European Semester. This shall be achieved by:
  8. Increase the level of cooperation between the European Parliament and national Parliaments.
  9. Reinforce the steer of the "Eurogroup:
    As the Eurogroup will step up its involvement and steering role in the revamped European Semester, a reinforcement of its presidency and provided means at its disposal, may be required.
  10. Take steps towards a consolidated external representation of the eurozone:
    The EU and the eurozone are still not represented as one voice in the international financial institutions (i.e. in "IMF), which mean Europeans speak with a fragmented voice, leading to the EU punching below its political and economic weight. Although the building of consolidated external representation is desirable, it is envisaged to be a gradual process, with only the first steps to be taken in stage 1.
  11. Integrate intergovernmental agreements into the framework of EU law. This includes the "Treaty on Stability, Coordination and Governance, the relevant parts of the "Euro Plus Pact; and the Intergovernmental Agreement on the "Single Resolution Fund.
  1. The intergovernmental "European Stability Mechanism should be moved into becoming part of the EU treaty law applying automatically for all eurozone member states (something which is possible to do within existing paragraphs of the current EU treaty), in order to simplify and institutionalize its governance.
  2. More far-reaching measures (i.e. commonly agreed "convergence benchmark standards" of a more binding legal nature, and a treasury for the eurozone), could also be agreed to complete the EMU's economic and institutional architecture, for the purpose of making the convergence process more binding.
  3. Significant progress towards these new common "convergence benchmark standards" (focusing primarily on labour markets, competitiveness, business environment, public administrations, and certain aspects of tax policy like i.e. the "corporate tax base) – and a continued adherence to them once they are reached – would need to be verified by regular monitoring and would be among the conditions for each eurozone Member State to meet in order to become eligible for participation in a new fiscal capacity referred to as the "economic shock absorption mechanism", which will be established for the eurozone as a last element of this second stage. The fundamental idea behind the "economic shock absorption mechanism", is that its conditional shock absorbing transfers shall be triggered long before there is a need for ESM to offer the country a conditional macroeconomic crisis support programme, but that the mechanism at the same time never shall result in permanent annual transfers - or income equalizing transfers - between countries. A first building block of this "economic shock absorption mechanism", could perhaps be establishment of a permanent version of the "European Fund for Strategic Investments, in which the tap by a country into the identified pool of financing sources and future strategic investment projects could be timed to occur upon the periodic eruption of downturns/shocks in its economic business cycle.
  4. Another important pre-condition for the launch of the "economic shock absorption mechanism", is expected to be, that the eurozone first establish an increasing degree of "common decision-making on national budgets" and an "enhanced coordination of economic policies" (i.e. of the specific taxation and employment policies implemented by the National Job Plan of each Member State - which is published as part of their annual National Reform Programme).

All of the above three stages are envisaged to bring further progress on all four dimensions of the EMU:[16]

  1. Economic union: Focusing on convergence, prosperity, and social cohesion.
  2. Financial union: Completing the "banking union and constructing a capital markets union.
  3. Fiscal union: Ensuring sound and integrated fiscal policies
  4. Political Union: Enhancing democratic accountability, legitimacy and institutional strengthening of the EMU.

Further reading[edit]


  1. ^ ECB webpage on Economic and Monetary Union
  2. ^ Bolton, Sally (10 December 2001). "A history of currency unions". Retrieved 26 February 2012. France persuaded Belgium, Italy, Switzerland and Greece 
  3. ^ Pollard, John F. (2005). Money and the Rise of the Modern Papacy: Financing the Vatican, 1850–1950. New York: Cambridge University Press. p. 39. "ISBN "0-521-81204-6. 
  4. ^ Link
  5. ^ Barre Report
  6. ^ Verdun A., The role of the Delors Committee in the creation of EMU: an epistemic community?, Journal of European Public Policy, Volume 6, Number 2, 1 June 1999 , pp. 308–328(21)
  7. ^ Delors Report
  8. ^ "As Euro Nears 10, Cracks Emerge in Fiscal Union" ("New York Times, 1 May 2008)
  9. ^ "Project Syndicate-Martin Feldstein-The French Don't Get It-December 2011". 2011-12-28. Retrieved 2012-05-14. 
  10. ^ Hacker, Björn (2013): On the Way to a Fiscal or a Stability Union? The Plans for a »Genuine« Economic and Monetary Union, FES, online at:
  11. ^ Busch, Klaus (April 2012): Is the Euro Failing? Structural Problems and Policy Failures Bringing Europe to the Brink, FES, online at:
  12. ^ Janssen, Ronald (2013): A Social Dimension For A Genuine Economic Union, SEJ, online at:
  13. ^ a b c "Towards a genuine Economic and Monetary Union" (PDF). European Commission. 5 December 2012. 
  14. ^ "Ex ante coordination of major economic reform plans –report on the pilot exercise". Council of the European Union (Economic and Financial Committee). 17 June 2014. 
  15. ^ a b "ESM direct bank recapitalisation instrument adopted". ESM. 8 December 2014. 
  16. ^ a b "Completing Europe's Economic and Monetary Union: Report by Jean-Claude Juncker in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz" (PDF). European Commission. 21 June 2015. 
  17. ^ "Economic governance review: Report on the application of Regulations (EU) n° 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013" (PDF). European Commission. 28 November 2014. 
  18. ^ "Green Paper: Building a Capital Markets Union" (PDF). European Commission. 18 February 2015. 

External links[edit]

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