The European Union - past, present and future

Content

1. Introduction

2. The long way towards European integration

3. The impact and influence of the Euro
3.1 The impact of the Euro as an internal common currency
Wage Transparency
Removal of Foreign Exchange Rates within the Eurozone
Lower borrowing costs and purchasing
3.2 The impact of the Euro as a global currency unit

4. Internal and External Trade Growth of the European Union
Focus in this part is on the EU

Appendix 1
The development of the European Union1 2 3

Appendix2
The long way to the European Monetary Union (EMU)3
The European Monetary System (EMS)
The main reasons for launching the EMS were:
The main features of the EMS were:
Problems and Crisis of the EMS
The European Monetary Union

Appendix4
The macroeconomic view :

Appendix4b
The impact of the Euro on European financial markets

Bibliography

1. Introduction

The following report shows the financial impact the EU ,and the EMS had on growth and development from a macroeconomic and microeconomic point of view. The report is divided into three main parts. The first part gives an overview of the development and emphasises the key elements of European integration. The second part is a closer look at the impact and influence of the Euro and the third part refers to the development of the European trade growth.

2. The long way towards European integration.

Focus^{[1] [2] [3]} is in this part is on the European Union.

Paris, Rome, Haque, Maastricht, Amsterdam,Madrid and Nizza. The names of European cities that became famous as milestones of European development is long. Although the integration process recently faced a setback in the ratification of the European constitution, the supranational-project “European Union” is a success story. Most obvious through the fact that so many countries were and still are keen to join the Union and become a Member State. The EU enlargement on May 2004 were ten Eastern European countries joined the EU is a very good example. However, the enlargement from the so called EU 15 to EU 25 implies also the turn away from the old idea of the “United Nations of Europe”. The idea first mentioned by Winston Churchill after the second World War in 1946 was in mind of many pro-european political characters from French Foreign Minister Robert Schuman to former German Chancelor Helmut Kohl.

The recent enlargement can be seen as a turning away from this political unification, but it can’t be seen as the end of further development. Moreover, the cultural variety of Europe which was often a drawback of ongoing European processes of the old continent is nowadays, in our knowledge, information and services based economy its most important resource. Cultural differences and variety are factors to cope with worldwide and who should better know that than the Europeans? The most important task for further development of the European Union will be the ongoing integration processes while obtaining variety and differences within the Union. Integration should not lead to total equality (See Appendix1).

The three key milestones since the EU was founded can be identified as:

1. The customs union
2. The single market
3. The economic and monetary union

The first step towards a single European Union economy was the removal of duties completed in 1968. Not only that there is free trade for the member states within the borders, there is also a guarantee for all imports that duty to pay is equal at whatever entry point to the EU is used. This lead to more efficiency, makes pricing more competitive and expands customer choice as well. However, the customs union was only a first step and further progress to economic integration took more than a decade.

The Single European Act signed in 1986 and set 1992 as a target date for the elimination of trade barriers which survived. More than 1000 legislation pieces were removed and barriers were broken down that had prevented service industries to expand across borders e.g. different national standards for goods or restrictions to invest or work within member states. Simultaneously many state owned monopolly sectors were privatised e.g. telecommunications, airlines, railways, postal services and energy.

The economic and monetary union was first discussed in 1969. The Werner Report introduced in 1970 (See Appendix2) contained a detailed description of how to implement the monetary union in three stages until 1980. This plan was never realised fully, but a mechanism for exchange rate coordination came into effect. The “snake in the tunnel” a mechanism which was provided for managed floating of EEC currencies within narrowed margins of fluctuations against the dollar. Economical tensions, dollar instability and the oil crisis contributed to the failure of the system, but it was the forerunner of the European Monetary System (EMS). The EMS (See Appendix2) was set up in 1979 at the initiative of Valéry Giscard d'Estaing, French president and Helmut Schmidt, German Chancelor. What made the EMS different to its forerunner was that under this system, each currency had an exchange rate vis-à-vis the other participating currencies. The central rate was fixed, but could be adjusted if all participating parties agreed. The actual exchange rate in the market could fluctuate around the central rate. The central banks were also committed to helping each other to keep the exchange rate within the determined band. At first frequent exchange-rate adjustments were required, but particularly between 1987 and the summer of 1992 the EMS was stable. However, during 1992 and 1993 significant currency unrest was seen, and it was decided to widen the fluctuation band. This in reality undermined the system. Nonetheless, the exchange rates of the EU member states have been generally stable since then (See Appendix2). The idea of a single currency was reawaken at an European Commission summit in Hanover in 1988. A committee headed by Jacques Delor prepared a report named the Delors Report (See Appendix2). As the Werner Report, the Delors Report proposed a transition to economic and monetary union in three stages. This time it was decided to go ahead with the plan and it was also decided that the first stage of Economic and Monetary Union, EMU, was to start on 1 July 1990.

3. The impact and influence of the Euro

3.1 The impact of the Euro as an internal common currency

Focus in^[4] this part is at the Eurozone member states (Euro12).

The end of the previous paragraph gave a description of the way towards the Euro. It is undoubtful that all involved parties realised that success in monetary integration could only be achieved when it is accompanied by independent fiscal policies and convergence towards price stability. This is guaranteed by the independent European Central Bank whose first objective is price stability while convergence is guaranteed by the Maastricht criteria. This stability oriented culture, in particular economic and price stability, is in the interest of every member state, especially after the often troubled pre-euro-phase. By implementing the Euro the twelve member states have given up independent control of a separate national currency, exchange rate and interest rate. What are the benefits of implementing the Euro, was it worth to give up national monetary policy?

Price Transparency^[5]

On of the biggest impacts not to say advantages is that prices are directly comparable within the Eurozone countries. The consumer wether a private or a business consumer can compare prices more easily and it is incrisingly difficult for companies to maintain differential pricing policies. Although there are still different prices due to different taxes, transport costs or national infrastructures. The price for the same tube of toothpaste was three times as much in some countries than in others. The statement made by Marsh (1999) states that price differences still exists, but it has to be considered that the Euro was at an early stage process with only seven months gone when Marsh made his statement.

Today, nearly 5 years after the introduction of Euro coins and notes prices differentials have narrowed and at least gradually reduced price differentials.

Wage Transparency

Employers are profiting from transparency caused by the single currency as well. Wages and salaries are easier to compare generally and within a company operating in different countries of the Eurozone. Employers based in Euro countries don’t need to convert currencies when making payments in Euro countries. Convergence of salaries and labour mobility is expected to increase because qualified people will ask themselve how much can I get here and how much there. Differences are existing in terms of taxation, benefits and purchasing power which will remain some differences even within the EMU.

Removal of Foreign Exchange Rates within the Eurozone

Eurozone companies are able to avoid exchange rate risk caused by fluctuation and adjustment which will increase their profits due to the elimination of cost for hedging or the avoidance of losses through unfavorable exchange rate movements. Another advantage is the removal of exchange rate transaction costs on all intra-Eurozone dealings. Most companies are operating worldwide and there are hedging, transaction costs and exchange risks when importing or exporting to the outside area.

Lower borrowing costs and purchasing

Banks are able to lend and companies and consumers are able to borrow money across countries of the Eurozone. This may cause a reduction of borrowing costs, especially for those based in countries were interest rates fall below the previous ones. More choice and flexibility leads in many cases to lower costs. The same choice and flexibility do firms have in terms of chosing a supplier outside of their home country. This means that possible savings can be achieved for those who consider to source their parts from other Eurozone countries. For governments the most important gains are lower interest on money they borrow due to a broader buyer and seller base and higher liquidity in a stable low-inflation environment guaranteed by the ECB.

Apart from those Transparency and cost saving factors for all participants, the general competition has increased and will increase in the future. The market to sell on and to buy from is simply bigger and improve economies of scale of Eurozone based companies. The Euro is affecting not only businesses. Consumers, travellers and tourists for everybody involved, the Euro makes life a bit simplier and is an important symbol for integration for the Europeans and to the rest of the world as well.

A special Macroeconomic view of the impact and influence of the Euro is given in Appendix4 (See Appendix4)

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^[1] European Commission (2003), „Going for growth-The economy of the EU“, Brussel

^[2] Central Intelligence Agency (2006), “The world factbook - The European Union”

^[3] Mercado et al (2001), “European Business”, 4th ed., FT PrenticeHall, pp 120 - 125

^[4] Mercado et al (2001), “European Business”4th ed, FT PrenticeHall pp 134 - 137

^[5] Marsh, Peter. (Aug 4, 1999),” Price is right for most companies despite the euro: Single currency has yet to make an impact and differences across the continent remain”, Financial Times. London (UK):. pg. 02