European Monetary Union: Definition, History, Policy & Members

Instructor: Monica Gragg

Monica has taught college-level courses in Tourism, HR and Adult Education. She has a Master's in Education and is three years into a PhD.

This lesson provides a brief overview of the European Monetary Union (EMU) and its role in the growth of the European Union. We'll learn how the EMU is involved in the European Union membership requirements and how it contributes to economic growth.

The European Union and the European Monetary Union

We so often hear the phrase, 'I want world peace', but how do we actually go about accomplishing this enormous task? We all may contribute in our own ways, but today we are going to talk about cooperation on the grand scale, cooperation among countries. You see, after the First World War, a group called the League of Nations was formed in Europe. What was its purpose? To promote world peace.

The League of Nations wanted European countries to act together so that they could rebuild after the war and protect themselves from future wars. This would mean having one economy, where countries would be governed by the same policies. It also meant that countries would rebuild and grow using the same monetary system. Hence, the idea for the European Monetary Union, also called the Economic and Monetary Union (EMU). It wasn't until 1990 that one economy, now known as the European Union (EU) was officially established. The European Monetary Union played a critical role in its development.

Before we explain EMU we must first define the European Union (EU). The EU is a political and economic union of European countries. In discussing the EU, members of the EU are referred to as states. The states (remember, they are the countries) use their resources and pay taxes to support one main economy. This union is built on the foundations of stability, prosperity, and better living standards. And of course, world peace!

The European Monetary Union (EMU) is a system of policies that manages the budget, and more importantly, facilitates the admission of new members into the EU. Each state is required to give a percentage of money to the EMU. That money is used for international trade, rural development, environmental protection, border protection, and promoting human rights. The money is also used to assist members when they are in financial and economic trouble. Greece is a recent example; the EU gave billions of dollars to help that country repay debt and recover from a recession. When new states join the EU, the EMU contributes to the three-stage process (which we'll talk about later). The process ultimately leads to two things: A state's financial contribution to the EU and its implementation of the Euro currency.

History

After the League of Nations was formed in 1929, other groups were formed to promote one economy, and eventually, the European Union. In 1951, six countries known as the Inner Six formed the European Coal and Steel Community (ECSC) to encourage peace in Europe by creating a common market for coal and steel. In the 1960s, the European Commission was founded to legislate agreements and new communities like the ECSC. It wasn't until the 1970s that a financial plan was established to facilitate these agreements and budgets among communities. In 1990, a three-stage process was established to shape the EU and the EMU into the organizations that exist today.

Three Stages to EU State Membership - History Continued

Stage One:

In 1990, the Copenhagen Criteria was created to set the rules for EU membership. To join the EU, countries must have a functioning economy, democratic governance and a belief in human rights. These rules still apply. At the same time, the EMU played a big role. You see, before 1990 some countries had limitations on how they could trade with other European countries. Once they joined the EU, those restrictions were eliminated. So the EMU had to create and implement new monetary policies for open trade. Before the EU, each country had its own inflation rate, interest rates, and exchange rates. Post EU, countries still had their own rates but also contributed to the solidarity rates of the EU. Which means that the EMU is responsible for monitoring both the individual member's economic stability and the EU's stability as a whole.

Stage Two:

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