The specification says you need to know the following on Monetary Union
- Monetary Union: why monetary union has become an aim of the EU, and the extent to which this has been embraced by member states; the steps taken towards achieving monetary union; the perceived benefits and drawbacks of monetary union; the extent to which monetary union is perceived as a success – including the impact of the current (July 2011) global recession and how the Eurozone has dealt with this, the impact of measures take to deal with it and the impact this has had on the workings and future of the Eurozone.
Definition: Monetary Union was seen as a key step towards economic integration. The euro, introduced in 1999 has become the key aspect of monetary union with the use of a single currency and single interest rate.
1) The euro survived the 2008 global recession, coming out stronger that it had been before against the pound and is a currency to challenge the dollar. There is still confidence in the currency seen in Latvias recent application and approval into the eurozone. Countries outside of the European Union who use the euro continue to do so because of its global strength. Over 25% of the worlds foreign reserves are in euros. The euro is also getting stronger against the dollar due to sound monetary policy from the ECB and confidence in Germanys commitment to the monetary union.
2) The eurozone crisis however, has damaged monetary union in some ways. The crisis has meant we have come to the brink of a ‘Grexit’ and a possibly Cypriot exit following the harsh conditions imposed on Cyprus with it’s bailout package which hit individual citizens. It has led to tensions in the future direction of the European Union more widely with Cameron and Merkel arguing for more austere measures within the European Union and ‘contagion’ spreading despite President of the ECB Draghi saying he will do ‘whatever it takes’.
3) Youth unemployment in Spain is 55% and debt to GDP is 92%. This last figure is important as one of the reasons monetary union failed so badly was that countries such as Greece never met the convergence criteria in the first place. There have also been failings in meeting the Growth and Stability Pact which both Germany and France have done. Arguably they have been able to do this because there is no strong institution to stop them, the ECB only had one target when it was created in 1998, to control inflation. Now that Spain is in crisis, it is not certain that the European Financial Stability Facility would be big enough to support Europe’s 5th biggest economy.
4) The crisis has born some good news however for monetary union. It has established a consensus that the way forward is tighter fiscal union. The commission won new powers to vet national budgets to ensure they are inline with EU law. Furthermore, efforts towards banking union have also increased with proposals of a single supervisory mechanism headed off by the ECB. The crisis has led to a need for ever closer union. Possibly this risks a twin speed Europe, further isolating countries such as Britain and those outside of the eurozone.