European Monetary Union

European Monetary Union - in euros, as will the financial...

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European Monetary Union A monetary union occurs when two or more independent countries agree to fix their exchange rates or to employ only one currency to carry out all transactions. advantages: 1. reduces uncertainty 2. promotes stability 3. eliminates exchange rate management as a trade barrier 4. saves resources that would have been employed in foreign exchange transactions The European Currency Unit serves as the basis for determining exchange rate parities. It is a basket made up of fixed amount of all EC currencies. Each currency has an official rate against other EC currencies and against the ECU. Deviations of +/- 2.25% are permitted. The European Central Bank comes into existence this summer. On January 1, 1999, the EMU will begin the move to a single currency, the euro. The European Central Bank will operate only
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Unformatted text preview: in euros, as will the financial markets. At the retail level, national currencies will continue to circulate and remain sole legal tender until July 2002. The euro will be introduced for retail transactions in January 2002. Thereafter, national currencies will be redeemed for euros for periods set by national legislation. European governments are giving up the ability to have an independent monetary policy. This would not be a problem if Europe is an optimal currency area (share the same currency without any adverse consequences). optimal currency area: homogeneity flexibility of wages and prices mobility fiscal transfers...
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