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Example research essay topic: Following The Development Of Economic And Monetary Union - 1,982 words

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The Economic and Monetary Union (EMU) is a single currency area within the European Union in which people, goods, services and capital move without restriction. Imperative to the success of the EMU is the implementation of a single European currency, the Euro, and the application of specific macro-economic policies by the EMU member states. Moreover, it is the foreseeable intent of European governments to create a framework for stability, peace and prosperity through the promotion of structural change and regional development. This paper will endeavor to highlight the fundamental gains likely to be accrued by the European business community as a result of EMU policy provisions. The developments and circumstances preceding the EMU formation will be examined to give insight into the functioning of a monetary union. Furthermore, it is essential to analyze the implications the EMU has for firms within both the European Union (Euroland) and other European nations.

To establish a strong understanding of the intricacies of the EMU, it is essential to discuss both the antecedents and major developments in this monetary union. The origins of the EMU can be traced to the formation of the European Coal and Steel community (ECSC) in the early 1950 s, which was the first attempt to harness European economic unity to achieve greater international competitiveness (Per Jacobson, 1999). The success of this venture prompted the foreign ministers of six ECSC nations to examine the possibility of further economic integration Hence, in 1957 one the most significant agreements in European economics history, The Treaty of Rome, was signed. The Treaty of Romes fundamental goal was to provide for the creation of a common market (Kenwood & Lougheed, 1999). The most significant aspect of this treaty was the commitment made by such countries as Belgium, France, West Germany, the Netherlands, Italy and Luxembourg to facilitate the free movement of goods, services and factors of production. Essentially, these European governments sought to eliminate internal trade barriers, create common external tariffs and harmonies member states laws and regulations (Hill, 2001).

This movement towards a common European market continued with relative success until the late 1960 s. During this period, the Bretton-Woods Exchange Rate Regime had begun to exhibit unmistakable flaws, whilst global inflation was alarming high. In addition, the revaluation of the German Deustchemark and the devaluation of the French Franc, created considerable exchange rate volatility within Europe (Barber, 1999). It was a common held belief amongst many member states, that Europe's ability to compete within the global economy hinged on the introduction of a single currency. Hence, in 1970 the Werner Committee was established to resolve the most efficient means to converge economic performance and currencies (Harris, 1999).

The Werner Report proposed a three-stage process for achieving a complete monetary union within a decade. The final goal would be the free movement of capital, the permanent locking of exchange rates and the eventual replacement of the EC 6 nations notes and coins with a single currency (Barber, 1999). The committee proposed a complete European Monetary Union by 1980, however the failure of the Smithsonian Agreement, the subsequent introduction of a floating exchange rate regime and the infamous Oil Price Shocks of the 70 s, caused the plans outlined by the Werner Committee to be abandoned (Harris, 1999). In retrospect, the endeavors of the EMU were bold considering the erratic economic climate of the 1970 s. Yet, even in this period of economic uncertainty, EC members still pursued the concept of European Unity (Princeton Economics, 1998).

In 1979, the European Monetary System (EMS) was established to foster a greater stability between member states currencies and stronger coordination and convergence of economic policies. The EMS consisted of four main components, the European Currency Unit (ECU), The Exchange Rate Mechanism (ERM), The Financial Support Mechanism (FSM) and the European Monetary Cooperation Fund (EMCF) (Harris, 1999). The ERM was at the heart of the EMS and provided for fixed but adjustable exchange rates between countries, whereby currencies could move within certain margins or fluctuations. When limits were breached the responsible authorities were required to impose appropriate policy measures (Europa Quest, 2001). The EMS enjoyed considerable success during the 1980 s, lowering inflation rates in the EC and easing the adverse financial effects of the global exchange rate fluctuations (Harris, 1999).

The most problematic aspect of the EMS was that it held no true sovereignty over member states, rather these countries still maintained autonomy over currencies and macro-economic policies (Harris, 1999). To rectify this systems inadequacy, Jacques Delors, the President of the European Commission, issued the Cockfield Report, which sought to define the current status of the European markets and establish the correct means for implementing a monetary union (Chulalongkorn University, 1999). Undertaking a concerted and structured attempt at implementing a single currency was imperative. (Harris, 1999). In 1987, the Single European Act was passed, based upon the recommendations outlined in the Cockfield Report (Chulalongkorn University, 1999). This paper outlined a comprehensive program of 282 measures to be implemented to achieve a single market and the timetable, which must be adhered to ensure the actions success (Harris, 1999). The Single European Act intended to have a single market in place by 1993.

It proposed the removal of all frontier controls between EC countries, the application of the principle of mutual recognition to product standards and open public procurement to non-national suppliers. In addition, the Act purported the need to lift barriers in the ECs retail banking and insurance industry and the elimination of restrictions on foreign exchange transactions (Hill, 2001). Pivotal to the Single European Acts implementation was the substantial surrender by member states of their economic autonomy to the European System of Central Banks (ESCB). The ESCB would assume responsibility for coordinating macro-economic policies.

Essentially, it was the primary role of the ESCB to fix internal exchange rates to the single currency, the Euro, control foreign reserves, interest and inflation rates (Harris, 1999). This actual movement of the EC towards a single currency, was hampered by the failure of the Delors Report to establish the economic standards which the EC member states must achieve in order to ensure convergence into one business cycle (Barber, 1999). In 1993, The Treaty of Maastricht expanded upon the Single European Act, primarily establishing a timetable for the implementation of the single currency and most significantly the convergence criteria to be reached by those nations ascending into the EMU (Princeton Economics, 1998). The Maastricht Convergence Criteria is an essential element of the EMU structure, as it sets five minimum economics requirements, which must be met in order to ensure membership (JP Morgan, 2001).

An ascending countrys inflation must be no higher than 1. 5 % above the average for the three EU members with lowest rates during the previous year, indicating price stability must exists within an economy. A prospective EMU member state should also experience long run interest rates no higher than 2 % above the three EU members with the lowest rates during the previous year. The exchange rates of each economy must have also been in the normal band of the ERM for 2 years without devaluating. Those considering imminent membership should also display fiscal prudence or rather the economy should not experience a budget deficit, which exceeds 3 % of its GDP. Finally, it is essential that national debt does not exceed 60 % of GDP (JP Morgan, 2001).

These strict economic standards ensure that all countries operating under the single currency could be brought to the same position of the business cycle. If all member nations are experiencing similar economic conditions, it is possible for the ESCB to prescribe uniform monetary and discretionary fiscal policy (Urban, 1997). The final agreement which of consequence to the development of the EMU, is the establishment of the Stability and Growth Pact (Harris, 1999). This arrangement was initiated in 1996 at the Dublin Summit of the European Council, establishing a set of rules relating to currency and budgetary disciplines for countries within Euroland. Essentially, this policy pact decrees that all EMU members must maintain the Maastricht Criteria and defines possible enforcement mechanisms (Salmon, 2000).

Specifically, the Stability and Growth Pact states those conditions under which EMU members have the right to exceed the set public debt to GDP ratio. Should authorization not be granted, member states make a mandatory deposit, which shall be transformable into a fine 2 years later (Per Jacobson, 1999). The Treaty of Maastricht also outlined the timetable of events, which has made the single currency fully operational as of February 2002. From January 1999, the Euro became the official currency the EMU, which ensured from that point forward all foreign exchange operations and new public debt was issued in Euros. On January 1 st 2002, Euro coins and banknotes went into circulation and in March 2002 the EMU authorities canceled national currencies as a means of exchange.

The development of the EMU has indeed been a long and involved process spanning more than 50 years, yet it will undeniably yield benefits for business within Euroland and have considerable implications for the business communities in other European nations. The Eurozone business community is likely to accumulate a number of benefits from the implementation of the EMU, making the lengthy nature of its development rather lucrative. The EMU facilitates the movement of goods, services, people and capital through the development of a single European currency and the removal of barriers to intra-community trade (Routine, 1997). Essentially, European businesses are being given the opportunity to exploit the liberalization of cross-border controls, which had previously diminished their ability to trade within Europe (Harris, 1999).

European firms will find it easier to access the 12 Eurozone markets, creating an opportunity to introduce new or modified products for each member states, or alternatively to provide a standardized set of goods and services for Euroland (Harris, 1999). The EMUs development also facilitates those companies who seek to derive the competitive advantage of factors of production inherent in some member states (Hill, 2001: 133). The greater movement of capital and labor allows firms to establish different aspect of their business operations throughout the Eurozone such as research and development in Germany, with production in Spain. The commitment of the EMU authorities to lowering transport cost specifically the abolition of restrictions on import taxes, allows Euroland firms to develop more efficient channel to distribute goods and services throughout Europe (Duisenberg, 1998).

Financial markets have also undergone considerable liberalization throughout the EMU evolution, resulting in the removal of barriers, which had limited cross-border borrowing. This commitment to reducing financial barriers, will ensure Eurozone firms have inexpensive access to finance in all EMU member states (Duisenberg, 1998). The culmination of greater product choice, increased movements of factors of production, enhanced channels of distribution and a more liberalized financial market, guarantees Eurozone firms will be operating in a highly dynamic, challenging and ever-expanding marketplace. Inevitably, this will stimulate the EMU to become a highly competitive economic community. Currently, intra-community trade accounts 60 % of member states international exchanges, a figure which is likely to grow with the success of the EMU (de Silly, 1997). It is foreseeable that initially Euroland firms may suffer under the pressure of such intense competition, however long run efficiency gains are likely to develop amongst EMU firms ensuring their longevity (Salvatore, 1998: 283).

The development of the EMU and the subsequent removal of exchange rate, trade and administrative barriers, will encourage firms to seek strategic alliances and join ventures (Harris, 1999: 84). Moreover, it is expected the union of firms could facilitate the sharing of intellectual property, research and development, capital and labour techniques, creating greater operational efficiency and improving both the firms competitiveness within the Eurozone and international markets (Antweller, 2001). It was a common held opinion amongst European business leaders, that political and economic integration was necessary to ensure to ability of European f...


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Research essay sample on Following The Development Of Economic And Monetary Union

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