The European Monetary Union (EMU) - The Euro as a Single Currency
Liberalizing trade is nothing new to the world, but we have never witnessed such a vast economic integration between sovereign countries like the integration carried out in the European Union. Customs duties between European countries started to come down steadily in the early 1950s and were abolished in 1968 with the introduction of a customs union and the implementation of the common external tariff. The official proclamation of the single market on 1 January 1993 marked the ending of non-tariff barriers to trade between Member States.
European Monetary Union will make it possible to complete European economic integration. The introduction of a single currency will mean price transparency, that is prices of goods can be directly compared on the markets of the participating Member States, which will merge into one market. Obstacles to trade such as the transaction costs, which add up to 0.4% of the EU GDP per year, and the exchange risk, will be eliminated. The competitive positions of companies can no longer be established by exchange-rate movements but will reflect productivity, inflation and cost differentials. This should permit a better allocation of capital and of available resources. The member countries will also be able to save administrative costs used for hedging operations. Over and above its positive effects on price stability and public finances, the single currency will make it possible to complete the single market and increase the benefits, which have already flowed from it.
Monetary Union will create an area within which national financial markets will become an integrated, wider and more flexible market. Financial institutions and financial centers will face new competitive conditions. The size of a specific national market will lose its significance. Competition will increase and could lead to greater harmonization across the euro area.
The introduction of the euro will have a great impact on the financial sector. This is because of three main reasons:
· The European System of Central Banks will be operating the single monetary
policy in euro. So, it will be necessary for financial institutions to be able
to operate in euro.
· Governments will issue all new debt in euro. Therefore, financial institutions,
payment systems and clearing systems will have to be prepared to operate in euro
from the start of monetary union.
· Businesses and citizens may decide to use financial products denominated in euro
at any time during the transition period. A financial institution that fails to
provide such services would run the risk of losing business.
The introduction of the euro will have important implications not only for the Union and its Member States but also for their partners. But while it will be a major event for international monetary relations and the international monetary system, there will be...