I. EUROPEAN UNION
The European Union is a sterling example of successful economic integration among the countries of a region. Formerly known as the European Economic Community, the Union was born out of the Treaty of Rome entered into among six European countries Belgium, Netherlands, Luxembourg, France, Germany and Italy who are also its founder members. It came into operation on January 1958.
Under the Treaty of Rome the member countries agreed to:
i. Gradual liberalization of trade among the members with a view of achieving zero tariff level as early as possible.
ii. Evolving a common external tariff among the member countries for inter regional trade.
iii. Evolving a common agricultural and transport policy.
iv. Removal of obstacles to the free movement of persons, services and capital.
v. Establishing the European common market with a view to reducing intra regional income disparities and promote trade among the members.
vi. Evolving common fiscal and economic policies to the extent possible for the functioning of the European Common Market and the remedy disequilibria in their balance of payments.
The member countries agreed to abolish in a phased manner all the tariffs among themselves and adopt a uniform tariff for trade with other countries. This was achieved by 1968. The next step was to integrate the European Community into a single market with single set of laws, tariffs and fiscal barriers. This was to be achieved b y 1992. In June 1985 the European commission issued the white paper listing various legislative proposals on completing the internal market. The proposals essentially centre on abolishing existing physical, technical and fiscal barriers. These include border controls, technical standards and regulations and disparities in tax regulations. The single European Act, which became effective in July 1987, provided the legal basis necessary to implement the integration of European market.
The European Union is operating as a single market with effect from first January 1993 with the elimination of barriers to the movement of goods, services, capital, manpower and skills within the bloc. At present the membership includes 15 countries with the addition of England, Ireland, Denmark, Greece Spain, Portugal, Austria, Finland and Sweden. It now constitutes the worlds largest and prosperous market with a share of 40% in the world trade.
II. EUROPEAN MONETARY SYSTEM
On the monetary front, the European monetary system was conceived to pave the way for European monetary integration. The main objective of European monetary system was to establish a zone of monetary stability in Europe and to achieve a greater convergence of financial and economic policies among member countries. It was thought of as a protection to the European countries from the instabilities of US dollars.
The European monetary system became operative from March 1979 with the members of European Economic Community except Britain which opted to remain outside the system. Each member country of the Euro exchange rate agreed to maintain exchange rates within certain margins through concerted intervention policies. It also provided for mutual credit facilities to implement the policy of stability of exchange rates.
An innovation of the European monetary system was the creation of European Currency Unit. The European Currency Unit occupied the central position in the system. Euro exchange ratet was the unit of account for mutual monetary assistance. It also served as an indicator of divergence in exchange rates of currencies of member countries. In addition, it was used as a measure of settlement among the central banks of the members. In short, European Currency Unit of account of the European Monetary system and occupied the same position that is occupied by Special Drawing Rates in International Monetary Fund.
III. EXCHANGE RATE MECHANISM
European Currency Unit was a basket of fixed amount of European Economic Community currencies.
The parties of all the European monetary system currencies were declared against the European Currency Unit. As the party of all European monetary system currencies was fixed in terms of European Currency Unit, each pair of these currencies had a fixed cross parity. The central bank of a member was required to keep the market rate for its national currency against each other participating currency within 2.25% above and below its cross parity. The central bank of each participating country declared selling and buying rates for each other participating currency 2.25% above and below the cross parity bank to deal at these rates was to ensure that the market rates do not go beyond the limits.
In addition to maintaining the cross parity with other currencies, each currency was allocated a maximum percentage deviation against its European Currency Unit central rate known as the divergence indicator. When this divergence was reached, there was a presumption that corrective action will be taken by the country concerned. The maximum divergence indicator against a currencys European Currency Unit central rate varied from currency to currency.
IV. ECONOMIC AND MONETARY UNION
The integration of the European Union was complete only with the evolving of a single currency for all European Union countries. At a summit meeting of the Euro exchange rate heads of government held in Netherlands in 1991, it was decided to achieve the economic and monetary union in three stages.
The members of the European monetary system are eligible to join the European monetary system subject to fulfillment of the following conditions:
i. The Yearly average inflation of the country not to exceed by more than 1.5% the inflation levels of three of the best performing member countries.
ii. The yearly average long term interest rates not to exceed by more than 2% that prevailing in the three best performing member countries.
iii. The government deficit not to exceed 3% of the gross domestic product or should be falling substantially towards this figure.
iv. The gross government debt not to exceed 60% of gross domestic product or must show a satisfactory fall towards this figure.
v. The exchange rate of the countrys currency must have moved for at least two years within the normal European monetary system margin.
V. LAUNCHING OF EURO
Euro was launched on January first 1999 in line with the schedule set out by the Maastricht Treaty. Eleven out of fifteen member countries in the European economic and Monetary Union which achieved the Maastricht convergence criteria irrevocably linked their domestic currencies to Euro in 1998.The conversion rates between Euro and the currencies of the member states opting the Euro which came into effect since January first 1999 are as follows: 1 Euro equaled 40.3399 Belgian francs; 1.95583 German marks; 166.386 Spanish pesetas; 6.55957 French francs; 0.787564 Irish pounds; 1936.27 Italian lire; 40.3399 Luxembourg francs; 2.20371 Dutch guilders; 13.7603 Austrian schillings; 200.482 Portuguese escudos; 5.94573 Finnish markkas.
The Euro is issued and administered by a European system of central banks which comprises of the European central bank and 11 national central banks which sets the monetary policy and can alone authorize the issuance of Euro notes. The Euro was initially transacted in the form of electronic currency. Euro notes and coins were put in circulation on January first 2002 and circulated along with the erstwhile national currencies. Euro exchange rate became the sole legal tender in the eleven countries on July first 2002.
The European Union is a sterling example of successful economic integration among the countries of a region. Formerly known as the European Economic Community, the Union was born out of the Treaty of Rome entered into among six European countries Belgium, Netherlands, Luxembourg, France, Germany and Italy who are also its founder members. It came into operation on January 1958.
Under the Treaty of Rome the member countries agreed to:
i. Gradual liberalization of trade among the members with a view of achieving zero tariff level as early as possible.
ii. Evolving a common external tariff among the member countries for inter regional trade.
iii. Evolving a common agricultural and transport policy.
iv. Removal of obstacles to the free movement of persons, services and capital.
v. Establishing the European common market with a view to reducing intra regional income disparities and promote trade among the members.
vi. Evolving common fiscal and economic policies to the extent possible for the functioning of the European Common Market and the remedy disequilibria in their balance of payments.
The member countries agreed to abolish in a phased manner all the tariffs among themselves and adopt a uniform tariff for trade with other countries. This was achieved by 1968. The next step was to integrate the European Community into a single market with single set of laws, tariffs and fiscal barriers. This was to be achieved b y 1992. In June 1985 the European commission issued the white paper listing various legislative proposals on completing the internal market. The proposals essentially centre on abolishing existing physical, technical and fiscal barriers. These include border controls, technical standards and regulations and disparities in tax regulations. The single European Act, which became effective in July 1987, provided the legal basis necessary to implement the integration of European market.
The European Union is operating as a single market with effect from first January 1993 with the elimination of barriers to the movement of goods, services, capital, manpower and skills within the bloc. At present the membership includes 15 countries with the addition of England, Ireland, Denmark, Greece Spain, Portugal, Austria, Finland and Sweden. It now constitutes the worlds largest and prosperous market with a share of 40% in the world trade.
II. EUROPEAN MONETARY SYSTEM
On the monetary front, the European monetary system was conceived to pave the way for European monetary integration. The main objective of European monetary system was to establish a zone of monetary stability in Europe and to achieve a greater convergence of financial and economic policies among member countries. It was thought of as a protection to the European countries from the instabilities of US dollars.
The European monetary system became operative from March 1979 with the members of European Economic Community except Britain which opted to remain outside the system. Each member country of the Euro exchange rate agreed to maintain exchange rates within certain margins through concerted intervention policies. It also provided for mutual credit facilities to implement the policy of stability of exchange rates.
An innovation of the European monetary system was the creation of European Currency Unit. The European Currency Unit occupied the central position in the system. Euro exchange ratet was the unit of account for mutual monetary assistance. It also served as an indicator of divergence in exchange rates of currencies of member countries. In addition, it was used as a measure of settlement among the central banks of the members. In short, European Currency Unit of account of the European Monetary system and occupied the same position that is occupied by Special Drawing Rates in International Monetary Fund.
III. EXCHANGE RATE MECHANISM
European Currency Unit was a basket of fixed amount of European Economic Community currencies.
The parties of all the European monetary system currencies were declared against the European Currency Unit. As the party of all European monetary system currencies was fixed in terms of European Currency Unit, each pair of these currencies had a fixed cross parity. The central bank of a member was required to keep the market rate for its national currency against each other participating currency within 2.25% above and below its cross parity. The central bank of each participating country declared selling and buying rates for each other participating currency 2.25% above and below the cross parity bank to deal at these rates was to ensure that the market rates do not go beyond the limits.
In addition to maintaining the cross parity with other currencies, each currency was allocated a maximum percentage deviation against its European Currency Unit central rate known as the divergence indicator. When this divergence was reached, there was a presumption that corrective action will be taken by the country concerned. The maximum divergence indicator against a currencys European Currency Unit central rate varied from currency to currency.
IV. ECONOMIC AND MONETARY UNION
The integration of the European Union was complete only with the evolving of a single currency for all European Union countries. At a summit meeting of the Euro exchange rate heads of government held in Netherlands in 1991, it was decided to achieve the economic and monetary union in three stages.
The members of the European monetary system are eligible to join the European monetary system subject to fulfillment of the following conditions:
i. The Yearly average inflation of the country not to exceed by more than 1.5% the inflation levels of three of the best performing member countries.
ii. The yearly average long term interest rates not to exceed by more than 2% that prevailing in the three best performing member countries.
iii. The government deficit not to exceed 3% of the gross domestic product or should be falling substantially towards this figure.
iv. The gross government debt not to exceed 60% of gross domestic product or must show a satisfactory fall towards this figure.
v. The exchange rate of the countrys currency must have moved for at least two years within the normal European monetary system margin.
V. LAUNCHING OF EURO
Euro was launched on January first 1999 in line with the schedule set out by the Maastricht Treaty. Eleven out of fifteen member countries in the European economic and Monetary Union which achieved the Maastricht convergence criteria irrevocably linked their domestic currencies to Euro in 1998.The conversion rates between Euro and the currencies of the member states opting the Euro which came into effect since January first 1999 are as follows: 1 Euro equaled 40.3399 Belgian francs; 1.95583 German marks; 166.386 Spanish pesetas; 6.55957 French francs; 0.787564 Irish pounds; 1936.27 Italian lire; 40.3399 Luxembourg francs; 2.20371 Dutch guilders; 13.7603 Austrian schillings; 200.482 Portuguese escudos; 5.94573 Finnish markkas.
The Euro is issued and administered by a European system of central banks which comprises of the European central bank and 11 national central banks which sets the monetary policy and can alone authorize the issuance of Euro notes. The Euro was initially transacted in the form of electronic currency. Euro notes and coins were put in circulation on January first 2002 and circulated along with the erstwhile national currencies. Euro exchange rate became the sole legal tender in the eleven countries on July first 2002.
