22.3 Introduction of the Euro and economic integration

The Maastricht Treaty paved the way for the euro, a common currency for EU nations. This bold move aimed to boost economic integration and stability across Europe. The euro's introduction in 1999 marked a major milestone in the EU's journey towards unity.

The European Monetary Union (EMU) was formed to coordinate economic policies among EU countries. It set strict criteria for euro adoption, ensuring member states met financial standards. This push for economic harmony reshaped Europe's financial landscape.

Creation of the Euro and European Monetary Union

Establishment of the Euro and EMU

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• Euro introduced as a common currency for participating European Union member states in 1999
• European Monetary Union (EMU) formed to coordinate economic and monetary policies among EU countries
• EMU aims to promote economic stability, growth, and integration across the eurozone
• Euro became physical currency in circulation on January 1, 2002, replacing national currencies in 12 EU countries

European Central Bank and Monetary Policy

• European Central Bank (ECB) established in 1998 as the central bank for the euro area
• ECB manages monetary policy for the eurozone, maintaining price stability and supporting economic growth
• ECB sets interest rates and controls money supply for the entire euro area
• ECB operates independently from national governments and EU institutions

Convergence Criteria and Euro Adoption

• Convergence criteria established as economic requirements for EU countries to join the eurozone
• Criteria include low inflation rates, stable exchange rates, and sound public finances
• Countries must maintain government deficit below 3% of GDP and public debt below 60% of GDP
• Convergence criteria ensure economic stability and compatibility among eurozone members
• Not all EU countries have adopted the euro (United Kingdom, Denmark, Sweden opted out)

Economic Integration and the Single Market

Development of the Single Market

• Single market concept aims to remove barriers to trade within the EU
• Allows free movement of goods, services, capital, and people (four freedoms) across member states
• Single market reduces trade costs, increases competition, and promotes economic efficiency
• Implementation began in 1993 with the removal of physical, technical, and fiscal barriers

Eurozone and Monetary Coordination

• Eurozone comprises EU member states that have adopted the euro as their official currency
• Currently includes 19 out of 27 EU member states
• Eurozone countries share a common monetary policy managed by the ECB
• Non-eurozone EU members maintain their national currencies and central banks

Exchange Rate Mechanism and Currency Stability

• Exchange Rate Mechanism (ERM) introduced in 1979 to reduce exchange rate variability
• ERM II replaced original ERM in 1999 with the introduction of the euro
• Helps stabilize exchange rates between euro and non-euro EU currencies
• Participation in ERM II for at least two years required for euro adoption
• Allows for fluctuations of up to ±15% around a central exchange rate

Stability and Growth Pact Implementation

• Stability and Growth Pact adopted in 1997 to ensure fiscal discipline among EU member states
• Reinforces Maastricht Treaty's convergence criteria for government deficit and debt levels
• Requires EU countries to submit annual stability or convergence programs
• Includes preventive arm (medium-term budgetary objectives) and corrective arm (Excessive Deficit Procedure)
• Allows for financial sanctions against eurozone countries violating fiscal rules