Sunday, February 19, 2012

ECB - Preparation of Economic and Monetary Union

Preparation of Economic and Monetary Union

"In the 1960s, with European economic integration making progress, the idea arose of creating a single currency.
However, a single European Economic Community (EEC) currency was not yet foreseen in the treaties. Moreover, at the time, all six EEC countries were part of a reasonably functioning international monetary system (the "Bretton Woods system"). Within this system, exchange rates of currencies were fixed but adjustable and remained relatively stable until the mid-1960s, both within the EEC and globally.
In 1969, the European Commission submitted a plan (the "Barre Plan") to follow up on the idea of a single currency because the Bretton Woods system was showing signs of increasing strain. On the basis of the Barre Plan, the Heads of State or Government called on the Council of Ministers to devise a strategy for the realisation of Economic and Monetary Union (EMU). The resulting Werner Report, published in 1970, proposed to create EMU in several stages by 1980. However, this process lost momentum in a context of considerable international currency unrest after the collapse of the Bretton Woods system in the early 1970s and under the pressure of divergent policy responses to the economic shocks of that period, in particular the first oil crisis.
To counter this instability and the resulting exchange rate volatility among the currencies, the nine members of the then EEC[1] relaunched the process of monetary cooperation in March 1979 with the creation of the European Monetary System (EMS). Its main feature was the exchange rate mechanism (ERM), which introduced fixed but adjustable exchange rates among the currencies of the EEC countries. Thus it required adjustments in monetary and economic policies as tools for exchange rate stability. Within the EMS framework, the participants succeeded in creating a zone of increasing monetary stability and gradually relaxing capital controls.
A further impetus for pursuing a single currency and EMU was provided by the adoption of the Single European Act in 1986. This Act set a timeframe for launching the Single Market and reaffirmed the need for achieving EMU.
In 1988 the European Council confirmed EMU as an objective and mandated a committee of monetary policy experts, in particular the governors of the EC central banks, to propose concrete steps leading to EMU.
The resulting Delors Report recommended that EMU be achieved in three steps. The legal basis for EMU still had to be created. The report led to negotiations that resulted in the Treaty on European Union, signed in Maastricht on 7 February 1992. This Treaty established the European Union (EU) and amended the founding treaties of the European Communities by adding a new chapter on economic and monetary policy. This new chapter laid down the foundations of EMU and set out a method and timetable for its realisation.

[1] Belgium, Denmark, Germany, Ireland, France, Italy, Luxembourg, the Netherlands and the United Kingdom."


[Mrt: I am surious about the origins in connecting to the changing monetary plane in seventies, also Barre report]

[Mrt Connected to this:]

"History of Monetary Integration
MONETARY INTEGRATION, remarkably was not listed as one of the primary goals of the Treaty of Rome that established the EC. Actually, European monetary integration, rather than being a persistent priority, has been a vague objective of the EC and only received attention periodically, often as a result of financial crises of certain magnitudes.
The first move towards monetary cooperation occurred during the early period of 1958-61 and was caused by the reality of persistent balance of payments surpluses in the original six members of the EC. During this period the EC established the Committee of Governors of the Central Banks to coordinate issues of exchange rate management and international monetary policy.
The increasing monetary instability of the late 1960s, created primarily by the inflationary pressures of the Vietnam war, generated financial dangers that appeared to threaten the existence of the European customs union. These concerns were expressed in the Barre Report which recommended the setting up of a machinery for monetary coordination. At the December 1969 Hague summit, the Barre Report motivated a detailed discussion on the issue of a coordinated European monetary policy. However, differences of opinion existed among the finance ministers and as a compromise solution, it was suggested that a study group be formed to review these issues carefully. The chairmanship of this group was assigned to M. Pierre Werner, the then Prime Minister of Luxembourg.
The Werner Report, published in 1970, has become a significant document on the topic of monetary integration. It recommended the development of the European Currency Unit (ECU), a centralized European credit policy, a unified capital market policy, a common policy on government budgeting and the gradual narrowing of exchange-rate fluctuations.
The monetary crises of the early 1970s that led to the rescinding of the gold convertibility of the dollar on August 15, 1971 and the floating of the guilder and mark created great pressures for finding an alternative solution to the abandoned Bretton Woods system of fixed exchange rates. The major economic powers, the U.S.A., the United Kingdom, Japan, Germany, Italy, Canada and France, known as G-7, in their Smithsonian Accord agreed to allow their participating currencies to fluctuate within a 4.5% band vis a vis the U.S. dollar and EC currencies to vary as much as 9% against each other. It was agreed that if a participating country's currency moved outside such a band that country's central bank was responsible for sufficient intervention to move its rate back within the acceptable range."

Source: Toward monetary union of the European Community: history and experiences of the European monetary system

 "...The Barre report of 1969 was the first  systematic EC approach to monetary issues. It argued that increasing international monetary instability would create problems for the Common Agricultural Policy and the working of the customs union (Giavazzi and Giovannini 1989)..."


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