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Economic and Monetary Union

Economic and Monetary Union (EMU) represents a major step in the integration of EU economies. It involves the coordination of economic and fiscal policies, a common monetary policy, and a common currency, the euro. Whilst all 28 EU Member States take part in the economic union, some countries have taken integration further and adopted the euro. Together, these countries make up the euro area.

The decision to form an Economic and Monetary Union was taken by the European Council in the Dutch city of Maastricht in December 1991, and was later enshrined in the Treaty on European Union (the Maastricht Treaty). Economic and Monetary Union takes the EU one step further in its process of economic integration, which started in 1957 when it was founded. Economic integration brings the benefits of greater size, internal efficiency and robustness to the EU economy as a whole and to the economies of the individual Member States. This, in turn, offers opportunities for economic stability, higher growth and more employment – outcomes of direct benefit to EU citizens. In practical terms, EMU means:

  • Coordination of economic policy-making between Member States
  • Coordination of fiscal policies, notably through limits on government debt and deficit
  • An independent monetary policy run by the European Central Bank (ECB)
  • The single currency and the euro area

Economic governance under EMU

Within EMU there is no single institution responsible for economic policy. Instead, the responsibility is divided between Member States and the EU institutions. The main actors in EMU are:

  • The European Council – sets the main policy orientations
  • The Council of the EU (the 'Council') – coordinates EU economic policy-making and decides whether a Member State may adopt the euro
  • The 'Eurogroup' – coordinates policies of common interest for the euro-area Member States
  • The Member States – set their national budgets within agreed limits for deficit and debt, and determine their own structural policies involving labour, pensions and capital markets
  • The European Commission – monitors performance and compliance
  • The European Central Bank (ECB) – sets monetary policy, with price stability as the primary objective.
  • The European Parliament - shares the job of formulating legislation with the Council, and subjects economic governance to democratic scrutiny in particular through the new Economic Dialogue.

What is meant by ‘economic integration’?

Generally, economic and monetary union is an advanced step in the process of economic integration. The degrees of economic integration can be divided into six steps:

  1. Preferential trading area (with reduced customs tariffs between certain countries)
  2. Free trade area (with no internal tariffs on some or all goods between the participating countries)
  3. Customs union (with the same external customs tariffs for third countries and a common trade policy)
  4. Single market (with common product regulations and free movement of goods, capital, labour and services)
  5. Economic and monetary union (a single market with a common currency and monetary policy)
  6. Complete economic integration (all the above plus harmonised fiscal and other economic policies).

When the European Union was founded in 1958 as the European Economic Community, the aim was to build a customs union and a common market for agriculture. Subsequently, this limited common market was extended to cover also goods and services in the single market, which was largely completed by 1993. Today, the European Union is on the fifth step of this model. Progressive economic integration did not start with the decision to create the euro: it is a long process, part of the history of the EU, and one of its major achievements.