EUROPEAN MONETARY UNION

(EMU)
Monetary Union
A monetary union is an arrangement where several
countries have agreed to share a single currency
amongst themselves.
 The European Economic and Monetary
Union (EMU) consists of three stages :
1. coordinating economic policy,
2. achieving economic convergence (that is, their
economic cycles are broadly in step) and
3. culminating with the adoption of the euro, the
EU's single currency.
• All member states of the European Union are
expected to participate in the EMU.
• The Copenhagen criteria is the current set of
conditions of entry for states wanting to join the
EU. It contains the requirements that need to be
fulfilled and the time framework within which
this must be done in order for a country to join
the monetary union.
Two main components to Monetary Union :
1. Exchange – rate union
• countries agree to permanently fixing of their
exchange rates with no margin of fluctuation.
• Creation of a single currency is the logical
outcome of such a situation emphasizing the
permanency of arrangement.
2. Complete capital market integration :
• All obstacles to the free movement of financial
capital between union members are removed.
• equal treatment to financial capital throughout
the members of the union.
EXPLICT REQUIREMENT
• Harmonised monetary policy
• Need of a central bank

fixed exchange rate
• Permanent commitment to
peg the exchangete leading to
logically leading to the
creation of a single currency.
• Requires a well developed
institutional framework such
as a single union central bank.
• Free movement of financial
capital between member
countries.
yMonetary union
• Allows for occassional
realignments and usually
permits ,argins of fluctuation
around central rate.
• Does not require.
• Exchange rate parities are
often defended only by resort
to capital controls.
Benefits of EMU
1. Stimulus to intra- EU trade
Removal of barriers to trade
• increase volume of trade between member
countries.
• Rise in economic prosperity of its members.
• For this a common medium of exchange is
needed.
2. More efficient allocation of factors of
production within the EU
• The permanent allocation of exchange rate
controls and absence of uncertainty created by
exchange rate fluctuation would no doubt lead
to a more efficient allocation of capital within
the union.
• similarly, once wages and salaries are
expressed in terms of a common currency,
EMU should result in a better allocation of
labour, as labour moves from areas of low-
marginal ti high- productivity regions.
• 3. Uncertainty caused by Exchange rate
fluctuations eliminated.
• Many firms become wary when investing in
other countries because of the uncertainty
caused by the fluctuating currencies in the EU.
Investment would rise in the EMU area as the
currency is universal within the area, therefore
the anxiety that was previously apparent is there
no more.