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About this book

The euro has been a remarkable success. By its tenth anniversary in 2009 it had become one of the world's major currencies, rivalled only by the US dollar in usage and global influence. It is used by 320 million people in 16 countries, and these figures look set to rise as, with the exception of Britain and Denmark, all EU member states are obliged to adopt the currency.

This major new text provides a theoretically-informed account of Economic and Monetary Union in the EU. It examines the history of European monetary integration, from its origins in the Bretton Woods Agreements through to the adoption of the euro by the accession states of Central and Eastern Europe. It provides a clear explanation of the key policies and institutions of economic integration and examines the role played by the euro in international markets. While it is informed throughout by the latest research in economics and political science, the book's technical discussion has been kept to a minimum to help make it an extremely readable introduction to European monetary integration.

Table of Contents

Chapter 1. Introduction

Abstract
On 1 January 1999 the European Union ushered in a new era with the successful transition from national currencies to the euro. Today the euro is one of the world’s major currencies, and only the US dollar surpasses it in terms of its usage and global influence. It is currently used by 320 million people in 16 countries, and with the exceptions of Britain and Denmark (which received derogations from Economic and Monetary Union (EMU) participation), all EU Member States are eventually obliged to adopt it as their currency, thus ensuring the growth and continuation of its influence.
Michele Chang

Chapter 2. The origins of economic and monetary union

Abstract
Monetary cooperation in postwar Europe did not begin with a drive towards monetary union and a single currency. These ideas gained support in later decades, but in the 1950s the importance of monetary cooperation was widely recognized as a global issue rather than a strictly European one. Indeed, for much of the postwar period concerns over European exchange rates took a back seat to international regimes dedicated to exchange rate cooperation. After the collapse of the Bretton Woods system in the early 1970s, however, European exchange rate cooperation took on newfound significance as a mechanism to protect European trading interests and later as a means to further develop European integration more generally. This chapter outlines these events and how the EU states progressed from an international exchange rate regime under Bretton Woods to a weakly enforced European regime (the Snake) to a more credible regime (the European Monetary System (EMS)) before graduating to a single currency in 1999. Economic theories explaining the rationale behind EU policy decisions are highlighted (and explained in further depth in later chapters), and the political rationale behind their eventual adoption is also considered.
Michele Chang

Chapter 3. The birth of the euro and the Eurozone

Abstract
While plans for monetary union got off to a quick start, implementing monetary union was a more arduous task. First the states needed to agree on the terms of monetary union, which would be outlined by the Maastricht Treaty. Old tensions between the monetarists and the economists flared, although an agreement was finally achieved. However, subsequent accords tried to rectify the imbalance that was reached, insofar as the Maastricht Treaty itself largely corresponds to German political demands at the expense of governments that would have preferred more political control and a greater official emphasis on economic growth (in particular the French government).
Michele Chang

Chapter 4. The institutions and decision processes of monetary union

Abstract
EMU has presented a major challenge to the Eurozone states. Monetary policy has been delegated to the European Central Bank (ECB), which sets interest rates for the entire euro area. While interest rate policy had largely been delegated to the Bundesbank during the EMS period, the complete delegation of monetary policy and the loss of the exchange rate as an adjustment tool still exacted a price from certain Member States. Even Germany, whose large economy plays a major factor in the ECB’s decision making, has had to deal with sub-optimal interest rates since the euro’s inception. Moreover, sharing a currency has also led to greater economic policy coordination, due to supposed greater spillover effects between participating economies. Governments have been loath to delegate even more power after creating such an independent central bank, however, and most economic policy coordination has been done under the auspices of soft law, which has proven to be less than completely effective. Finally, as a fledgling currency area, the Eurozone must still prove its independence and credibility to markets while maintaining its legitimacy. This chapter addresses these issues by examining economic governance in the Eurozone. The first part looks at the basic architecture of monetary union (the monetary and economic pillars), followed by the key actors and institutions involved in Eurozone governance and the roles that they play. The chapter concludes with a consideration of the major theoretical issues associated with the governance of the Eurozone.
Michele Chang

Chapter 5. Centralizing monetary policy cooperation: the European Central Bank

Abstract
The most visible symbol of monetary union (aside from the euro itself) is the European Central Bank (ECB). Located in Frankfurt, the city of the bank upon which it was modelled (the German Bundesbank), the ECB sets monetary policy for the second largest international currency. It is one of the most independent central banks in the world, and the ECB has zealously guarded its independence from any signs of political interference. This chapter outlines the ECB’s development, describes its institutional capacity, and provides an economic and political rationale for its structure. The final part of the chapter considers the controversies that continue to surround the ECB.
Michele Chang

Chapter 6. Decentralizing economic policy cooperation: the Stability and Growth Pact and the Lisbon Strategy

Abstract
The delegation of interest rate policy to the European Central Bank (ECB) was the most dramatic step in the monetary integration process. However, in order for EMU to succeed, supplementary policies needed to be introduced in order to support it. Monetary union was never viewed as an end in itself; both spillover effects leading towards monetary union (such as the single market) and the spillover effects expected to arise from monetary union (political integration and undertaking structural reforms) make an understanding of economic policy cooperation necessary in order to judge the success of EMU. Monetary policy does not exist in a vacuum, and the wrong policy mix between ECB decisions and Member State policies could negate any positive effects or even worsen economic conditions in both a Member State and the Eurozone as a whole. Conversely, a positive synergy could also be created in which economic and monetary policy support one another.
Michele Chang

Chapter 7. The European Union without EMU: the United Kingdom, Denmark, Sweden and the accession countries

Abstract
European Monetary Union has the distinction of being among the few EU policies not to require the participation of all EU Member States. This indicates the politically divisive nature of monetary union, as without the possibility of derogation it is unlikely that the Treaty would have been ratified. While in other contentious EU policy areas (such as the Common Agricultural Policy) states were expected to adopt the entire acquis despite reservations about any specific issue areas, monetary union was treated differently in order to ensure that monetary integration would not be derailed due to a small number of recalcitrant Member States. Thus neither Denmark nor the United Kingdom is obliged to adopt the euro in the future.
Michele Chang

Chapter 8. The international role of the euro

Abstract
Since French president Charles de Gaulle decried the United States’ ‘exorbitant privilege’ and its misuse of this power in the 1960s, the potential benefits and prospects of Europe taking over such a role have figured among the most important implications of European monetary cooperation. While it would entail both economic and political costs, the gains could be substantial. This chapter evaluates the international role of the euro. It first reviews the progress that the Eurozone has made in achieving the status of an international currency and its ability to represent itself in international fora. It continues with an evaluation of economic and political theories associated with these topics. The conclusion considers future prospects for the euro as an international currency and dollar alternative in light of the inertia that favours the dollar and the governance structure that impedes the Eurozone.
Michele Chang

Chapter 9. The Eurozone: an initial balance sheet

Abstract
A central theme in this book is the political ramifications of the adoption of the single currency in Europe. The reasons for its creation were largely political, as discussed previously, though much of the rhetoric surrounding it rests on technocratic arguments related to how it would improve the functioning of the Eurozone economy. This chapter considers both the economic and political consequences of the euro thus far. Has the euro measured up to economic and political expectations? Why or why not?
Michele Chang

Chapter 10. Conclusion: An efficient and legitimate EMU?

Abstract
In 2008 celebrations occurred in both Brussels and Frankfurt in honour of the tenth anniversary of Economic and Monetary Union (EMU) and the European Central Bank (ECB). Although the major success of creating a new currency that has become the second most important in under a decade was justifiably emphasized, monetary union also had some disappointments and unexpected surprises. Weak economic growth in the Eurozone, economic divergence among Member States, and the slow pace of structural reforms have frustrated EMU’s potential. Public scepticism in many states towards greater integration, including monetary integration, remains significant.
Michele Chang
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