In the 60 years since the signing of the agreements to create what was to become the European Union (EU), member countries’ economies have slowly started to emerge from the economic crisis of the mid-2000’s.
The EU’s greatest achievement was the creation of the Economic and Monetary Union (EMU). This was one of the EU’s most ambitious undertakings and was implemented in several phases over the years.
This EMU established a common currency in the member countries, the euro, as well as mechanisms to coordinate economic and budgetary policies, while establishing a system of economic governance.
This governance has been based on a single monetary policy and a policy of change shared by the European Council and the European Central Bank.
One question to ask is: What economic evolution has the European Union undergone in its 60 years of existence?
Non-existence of European monetary action (1945 -1969)
The European Union was born out of a desire to end the frequent and bloody conflicts between neighbors that culminated with World War II. Throughout its history, the European Union has carried out several attempts to strengthen economic cooperation among its member countries with the economic and monetary union having been an aspiration since the late 1970s.
However, the first step toward the economic and political union to achieve lasting peace was the creation of European Coal and Steel Community in the 1950s. Its six founding countries were Germany, Belgium, France, Italy, Luxembourg and the Netherlands.
The creation of the European Union we know today can be divided into various stages. The first stage corresponds to the period from 1957 to 1969, after the signing of the Treaty of Rome. This period was characterized by the absence of monetary policy at a European level, since the Treaty of Rome had only a few provisions for economic cooperation, but it brought about the creation of the European Economic Community (EEC) or “common market”.
During this period the six founding members participated in the international monetary system of Bretton Woods. It was at this stage that the proposal for creating a common currency arose, although the Bretton Woods system did not require it, as it operated with a stable fixed parity system.
Memorandum on “Coordination of Economic Policy and Monetary Policy in the Community” (1969)
In light of the tensions that were beginning to emerge in the Bretton Woods system, the European Commission presented the memorandum on “Coordination of Economic Policy and Monetary Policy in the Community” known as Plan Barre to the Council in early 1969.
The plan was to achieve convergence and compatibility among the member countries’ economic objectives, the coordination of their economic policies and monetary cooperation at the member country level.
A series of measures were proposed, which included the coordination of medium-term economic plans, the establishment of immediate and unconditional short-term credit facilities for those with difficulties in their balance of payments, and the establishment of medium-term credit facilities with a conditional term for persistent balance of payments difficulties.
Werner Report (1970)
The Werner Report, or Werner Plan, proposed reaching the final goal of a full integration over a 10-year horizon through a process consisting of three stages:
The first stage, which was to be concluded in 1973, was intended to limit exchange rate fluctuations in the member states’ currencies, to expand credit facilities in the short and medium term, and to achieve greater cooperation between the economic policies of member countries.
In the next two stages, exchange rates would be fixed irrevocably. The gradual unification of the capital markets would be carried out until the full liberalization of capital movements was achieved, in order to create a common central bank by the plan’s end.
Due to the great monetary instability caused by the 1970s energy crisis, the project to implement the Werner Report, which should have begun in 1980, was never put into action.
European Monetary System (1979)
In order to counter the instability and volatility of exchange rates, the member countries decided to create the European Monetary System (EMS) with the participation of all member countries of the European Economic Community (EEC), with the exception of the United Kingdom.
With the creation of the EMS at the beginning of 1979, a new stage of economic integration in Europe began.
The EMS was created through the agreement of the central banks of European Community member countries in order to manage intra-Community nominal exchange rates and to finance interventions in the foreign exchange markets.
Its main objective was to establish an area of monetary stability by reducing fluctuations between the currencies of the participating countries. That is, a system of fixed but adjustable exchange rates, where exchange rates were delimited with fluctuation bands for nominal exchange rates.
The European Monetary System established a grid of bilateral parities between all the participating currencies and also parities of each of the participating currencies with respect to the European Currency Unit or ECU (a basket consisting of a certain amount of each currency of the 15 countries that formed the European Union).
The institutional development of the European Economic Union begins (1988)
In 1988 the institutional development of the European Economic & Monetary Union (EMU) began. At the European Council meeting in Hanover, the Single European Act was adopted; the Member States confirmed the objective of the progressive development of an economic and monetary union.
The Delors committee submitted a report in April 1989, which envisaged the creation of a European System of Central Banks and a single currency, while envisaging the transition to an Economic Monetary Union as a process composed of 3 phases:
- Phase 1: Strengthen cooperation between central banks between June 1990 and January 1992.
- Phase 2: Creation of a European System of Central Banks (ESCB), as well as the progressive transfer of decision-making power in monetary policy.
- Phase 3: Irrevocably fix the national currency items and these would be replaced by the single European currency.
Treaty of Maastricht (1992): Legal framework of Economic and Monetary Union
The Maastricht Treaty established the legal framework for EMU, which established the basic timetable for its main stages and set the convergence criteria for the member countries.
The first phase, which began in July 1990, consisted of free movement of capital in the European Union (removal of exchange controls), increased resources to eliminate inequalities between the regions of the Member States (Structural Funds) and economic convergence through multilateral surveillance of the economic policies of member countries.
The second phase, which began in January 1994, established the creation of the European Monetary Institute (EMI). It would carry out the necessary preparatory work for the establishment of the European System of Central Banks (ESCB), for the management of the single monetary policy and for the creation of a single currency in the third stage.
At the end of 1995, the European Council decided that a European monetary unit, to be introduced in the third phase beginning at the beginning of 1999, would be called ‘Euro’, and determined the chronological order of the events that marked the transition process to the euro.
The aim was to achieve the independence of the national central banks and the adoption of rules aimed at reducing budget deficits. At the European Council in mid-1997 the Stability and Growth Pact, which aims at ensuring budgetary discipline, was adopted.
The third stage, at the beginning of 1999, and the last stage of the Economic Monetary Union were the fixing of the exchange rates of the currencies of the 11 participating member countries which had participated from the beginning of the European Union and the beginning of the implementation of the monetary policy under the sole responsibility of the European Central Bank (ECB).
Those who were part of the European Union and wanted to adopt the euro had to first meet the convergence criteria established by the Maastricht Treaty.
Expansion and Tricky Times Begin (2000 – Today)
European Central Bank
The euro has been the new day-to-day operating currency of many of the European Union member countries since 2002 and more and more countries are adopting the euro as their medium of exchange.
From 2004 onwards, the political divisions between Eastern Europe and Western Europe were finally settled by the incorporation of these countries into the European Union. In 2008, the financial crisis hit, shaking the foundations of the world economy and, above all, the policies that had been applied up to that point.
The Treaty of Lisbon was put into action in 2009. It provides for a modernization of European institutions and more efficient working methods within the European Union.
By 2010, the global economic crisis had hit the countries of Europe so hard that several countries had to receive financial help in order to cope with their difficulties. The Banking Union was established in 2012 with the aim of creating a much safer and more reliable banking sector.
From 2014 onward, the massive entry of Eurosceptics into the European Parliament, the geopolitical situation involving the Crimean Peninsula following its annexation by Russia, and an increase in religious extremism in the Middle East followed by the exodus of Syrian refugees to Europe led to more restrictive policies and caused some of the member countries to consider whether they still want to continue in the European Union (as evidenced with Brexit).
In 2016, Mario Draghi, President of the European Central Bank, stimulated markets by lowering benchmark interest rates to 0% in addition to buying corporate debt through the issuance of the TRIO Programme to lend money to banking entities.
Raúl Jaime Maestre is a professor at IEBS Business School, entrepreneur of business training and a finance professional. He also researches business creativity and innovation. He is also the author of “El libro verde del emprendedor colaborativo” and of the book “Emprendedor social, ¡Tú puedes!” and a participant in the TV program ‘Tribuna Finanzas‘ (Mexico).
El Blog Salmón is a space dedicated to reporting the very latest on the economy, finance and the business world, not to forget the domestic Spanish economy. And all of that in the color of the economy: salmon. The original version of this blog post is available in Spanish: Hace 60 años comenzó el germen de la Unión Europea, estos son los hitos económicos desde entonces
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