European Union

BACKGROUND

The European Union (EU) was founded as the European Economic Community (EEC) by the Treaty of Rome in 1957 to promote economic and political integration in Europe. The beginning of the EEC followed the creation of the European Coal and Steel Community, created after World War II as a means of promoting integration among former enemies. The EEC has expanded from its original six members (Belgium, France, Germany, Italy, Luxembourg, and Netherlands) to include United Kingdom, Ireland, and Denmark in 1973; Greece in 1981; Spain and Portugal in 1986; and Austria, Finland, and Sweden in 1995.

All 15-member states hand over some control to the EU’s network of institutions. National governments are represented in the Council of the European Union, whilst citizens of the member states are elected to the European Parliament. In 1993, the Maastricht Treaty (which renamed the EEC as the European Union), created European citizenship. It strengthened the power of the European Parliament, laid out plans for the Economic and Monetary Union, as well as for committed members to negotiate for expansion of the EU to include Central and Eastern European countries. As part of the EMU, 12 EU member countries (Belgium, France, Germany, Greece, Italy, Spain, Portugal, Finland, Austria, Netherlands, Ireland and Luxembourg) adopted a new common European currency, called the “Euro”. The Euro currency entered into general circulation in January 2002. The monetary policy is managed by the European Central Bank (ECB), which works in collaboration with the national central banks of the 12 Euro zone countries.

The treaty on European Union (often called the Maastricht Treaty) founded the EU and was intended to increase political, economic, and social integration among member states. It is worth noting that the treaty committed the EU to Economic and Monetary Union (EMU). Under the EMU, member nations would combine their economies and adopt a single currency by 1999. A single currency was a natural complement to the European Union’s single market, allowing it to function more efficiently and making it more favorable to growth. Several benefits would be derived through the main policies of the EMU, which are as follows:

• Elimination of exchange rate fluctuations: this provides a more stable environment for trade within the Euro area by reducing risks and uncertainties for both importers and exporters, who previously had to consider currency movements into their costs. Businesses are better able to plan their investment decisions because of reduced uncertainties. Independent research suggests that the euro has already promoted significant growth in trade within the Euro area.

• Elimination of the various transaction costs related to the exchange and the management of different currencies due to elimination of exchange rate fluctuations. For instance, the costs resulting from:

- Foreign exchange operations themselves by buying and selling foreign currencies.

- Hedging operations intended to protect companies from adverse exchange rate movements.

- Cross-border payments in foreign currencies, which are normally more costly and slower than domestic operations.

- Management of several currency accounts, which cause difficulties in currency management and internal accounting systems.

• Price transparency: consumers and businesses can compare prices of goods and services more easily when always expressed in the same currency. Easier price comparisons encourage competition and hence lead to lower prices in the short to medium run. Consumers, wholesalers and traders can buy from the cheapest source, thus putting pressure on companies trying to charge a higher price.

• More opportunities for consumers: the single currency makes it simpler for consumers to travel and to buy goods and services abroad, particularly when coupled with the progress of e-commerce.

• More attractive opportunities for foreign investors: a large single market with a single currency means investors can do business throughout the euro area with minimal interference and can also take advantage of a more stable economic environment.

INTRODUCTION

The introduction in 1999 of the euro - the single currency of the European Union - marked the beginning of the final stage of Economic and Monetary Union (EMU) and the start of a new era in Europe. This historic achievement was the conclusion of a lengthy process that began in 1957 about forty-two