European Economic and Monetary Union (EMU)

EMU: Definition 

The Economic and Monetary Union (EMU) is a three-stage, multi-year process to converge the economies of member countries within the European Union to operate under one regulatory framework, using the Euro and complying with a uniform set of rules, regulations, and policies.

While the first attempt to create a European economic and monetary union dates back to 1929, before the Wall Street crash and the Great Depression, it was not until 1988 when the European Commission tasked an ad-hoc committee of central bankers and economists to create a viable plan to implement a unified economic and financial system.

It resulted in the creation of the EMU and the Maastricht Treaty of 1992, which formed the European Union in its most recent form. The creation of the European Central Bank in 1998 laid the groundwork for the Euro to become the official currency of the EMU, also known as the Eurozone, in 1999.

The Three Stages of the EMU 

Eleven EU members were part of the initial EMU to create a single currency in a unified ecosystem. They completed the three stages together, and the EMU expanded since then across the EU.

Stage One (From July 1st 1990 to December 31st 1993) 

• Freedom of capital transactions and cross-border capital flows
• Increased central bank cooperation
• Unrestricted use of the ECU-European Currency Unit (the ECU preceded the Euro)
• Improvement of economic convergence

Stage Two (From January 1st 1994 to December 31st 1998) 

• Establishment of the European Monetary Institute (EMI)
• Member ban on obtaining credit lines from their respective central banks
• Increased monetary policy coordination
• Further advancement and strengthening of economic convergence
• National central bank independence before the establishment of the European System of Central Banks
• Preparatory work for Stage Three

Stage Three (Starting January 1st 1999) 

• Irrevocable fixing of currency conversion rates
• Introduction of the Euro as the single currency across the EMU, replacing and eliminating national currencies
• Launch of the European System of Central Banks with the European Central Bank (ECB) as the central bank of the EMU responsible for managing the Euro
• The establishment of the intra-EU exchange rate mechanism (ERM II)
• The establishment of the Stability and Growth Pact

Please note:

• The above dates are for the original eleven EMU members

EMU Member Countries 

Conclusion 

The EMU combines qualifying EU member countries into one economic and fiscal market, also known as the single market. It has an independent central bank headquartered in Frankfurt, Germany, the European Central Bank (ECB), which sets monetary policy and supervises banks within the EMU. The ESMA is the financial regulator, and the EMU ensures all member countries operate under a unified set of rules and regulations and frictionless capital movement.

FAQs 

What is the EMU in finance?

The EMU ensures complete freedom for capital transactions across all member states using the Euro, the official currency of the EMU. The EMU coordinates economic and fiscal policy-making and the independent monetary policy dictated by the European Central Bank (ECB). It also creates unified rules, regulations, and supervision within the EMU.

How does the EMU work?

The EMU maintains a single market with unified rules, regulations, and supervision. The ECB is the central bank governing monetary policy, and the ESMA is the financial regulator. A three-stage membership system exists, and all EMU members satisfied the strict set of requirements over several years before completing the third stage and implementing the Euro as their national currency.

Is the ECB part of the EMU?

The ECB is part of the EMU. It is the central bank of the EMU responsible for setting an independent monetary policy and acting as the steward of the Euro.

What is the difference between the EU and EMU?

Every EMU member is part of the EU, but not every EU member is part of the EMU. The EU has 27 member countries versus 20 for the EMU. All EU members except Denmark, which has a legal opt-out to replacing the Danish Krone with the Euro, strive to become EMU members.