Transition to Euro currency for new EU members

Running Head : Transition to Euro Currency for New EU Members

Transition to Euro Currency for New EU Members

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Transition to Euro Currency for New EU Members

Introduction

The euro is the single , common currency for the eleven member nations of EMU , a subset of the fifteen member-nation European Union (EU . To qualify for EMU membership , each EU country had to meet a strict set of financial criteria

The idea for a common currency between European nations had been discussed in economic

circles for decades , but it did not get the go-ahead until 1992 . That year , European Union countries signed the Maastricht Treaty , an agreement which outlined the guidelines for participating in what would eventually be known as the euro currency The countries which opted to join EMU are : Belgium , Austria , Finland France , Luxembourg , Italy , the Netherlands , Germany , Spain , Ireland , and Portugal . Greece failed to meet the Maastricht criteria , and Britain Sweden , and Denmark have chosen to watch from the sidelines--at least for the time being

The euro has been years in the making . Ever since the Treaty of Rome in 1957 in which a common European market was declared as a European objective , Europe has been steadily moving towards a common currency From 1958-1985 , six European countries formed a customs union . They had a common commercial policy with common external tariffs on imports but integration of economic policy was minimal . In 1985 , the common market was formed . This turned them into a large economic power , acting in world trade as a single unit . From 1992 onwards , the single market became an economic and monetary union

In to integrate the new currency in the economy , countries have to pursue strict convergence criterion as specified in the 1992 Maastricht Treaty . For example , the ratio of government deficit to GDP must not go beyond 3 . Others include an obligation to attain price and currency stability

In 1999 , the exchange rates of the participating currencies were irrevocably set and the eleven currencies became subdivisions of the euro . Till 2002 , the euro existed only as a unit of account . The final step was the introduction of euro notes and coins in 2002 . National currencies were slowly taken out of circulation

The new currency , along with the European Central Bank (ECB ) and the national central banks of the member states , constituted the new monetary authority of the European Community . Hence , we proceed to examine the theory behind monetary integration . Since benefits from monetary integration mostly arise from a reduction in transaction costs the greater the volume of global trade between the members , the greater is the predicted cost saving . In the European Union , the ratio of inner trade on EU GDP is approximately 17 per cent . This is much lower than trade between the U . S . Fiscal transfers allow counteraction of asymmetric shocks in a currency area . Unlike the highly developed fiscal federal system in the US where income can be transferred to areas hit by asymmetric...