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Summaries of EU Legislation

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EU economic and monetary union

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EU economic and monetary union

 

SUMMARY OF:

Article 119 of the Treaty on the Functioning of the European Union

Article 140 of the Treaty on the Functioning of the European Union

WHAT IS THE AIM OF ARTICLES 119 AND 140 OF THE TREATY ON THE FUNCTIONING OF THE EUROPEAN UNION?

  • Article 119 states that the European Union (EU) and EU countries will coordinate their economic policy and define and implement a single monetary policy and exchange rate policy. It refers to the introduction of a single currency, the euro, and lays down some guiding principles.
  • Article 140 states that EU countries must meet specific ‘convergence criteria’ if they are to enter the 3rd stage of the EU’s economic and monetary union (EMU). The 3rd stage involves adopting the euro as currency and implementing a single monetary policy in the EU countries concerned.

KEY POINTS

  • The EMU is a process to align economic and monetary policies in the EU countries. It comprises 3 stages:

    • 1st stage (1990 - 1993): free movement of capital between EU countries;
    • 2nd stage (1994 - 1998): coordinating EU countries’ monetary policies, increasing cooperation between their national central banks and bringing their economies closer together (i.e. economic convergence);
    • 3rd stage (1 January 1999 onwards): the gradual introduction of the euro and implementation of a single monetary policy under the responsibility of the European Central Bank (ECB).

While the first 2 stages of EMU have been completed, the final stage is not yet complete. To date, just 19 EU countries - referred to collectively as ‘the euro area’ - have adopted the euro as their currency.

Transition to the euro

  • Before it can introduce the euro, an EU country must first meet several economic and legal requirements - the convergence criteria.
  • The purpose of the economic convergence criteria is to ensure that the EU has a stable economy and financial situation.
  • The legal convergence criterion stipulates that EU countries’ laws must be compatible with the EU treaties, particularly on the points relating to the national central bank and the currency.
  • When an EU country meets all these requirements, it can adopt the euro as its currency. The euro then replaces the former national currency and becomes that country's official currency.
  • At least every 2 years, the European Commission and the ECB assess what progress EU countries have made towards meeting the convergence requirements. If they judge that a country is able to move on to the 3rd stage of EMU, the Council takes a decision that the country concerned can adopt the euro as its currency.

European Central Bank (ECB)

The ECB plays an essential role in EMU. The Bank independently determines the monetary policy of the countries in the euro area. It also has the sole power to authorise the issue of euro banknotes. EU countries may issue coins, but the ECB must first authorise the annual amount to be issued.

First countries in the euro area

  • 3 May 1998 is an historic date as regards the launch of the 3rd stage of economic and monetary union. On this date, the Council adopted a decision acknowledging that 11 EU countries (Austria,Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain) had met the necessary conditions to introduce the single currency on 1 January 1999. In 2000, a similar decision was taken on Greece, which entered the 3rd stage of EMU in January 2001.In 1998, the Council adopted a decision acknowledging that 11 EU countries (Austria,Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain) had met the necessary conditions to introduce the single currency on 1 January 1999. In 2000, a similar decision was taken on Greece, which entered the 3rd stage of EMU in January 2001.
  • The euro was then introduced in 2 steps:

    • 1 January 1999: the euro was introduced as ‘book’ money* and the conversion rates were fixed with the former national currencies, which thus became non-decimal units of the euro;
    • 1 January 2002: euro coins and banknotes were introduced in the EU countries. European citizens and businesses could then make their cash payments in euros.

Expansion of the euro area

  • In principle, all EU countries are supposed to join the 3rd stage of EMU and thus to adopt the euro. However, some have not yet met the economic and legal requirements. They are exempted for the moment, until such time as they can introduce the euro. The euro area has expanded several times to include more countries:

Exemptions

The UK and Denmark have an opt-out from participating in EMU, the details of which are set out in Protocols Nos 15 and 16, annexed to the EU’s founding treaties. They have reserved the option of ending their exemption arrangements and applying to join the 3rd stage of EMU, but have not so far announced any such intention.

BACKGROUND

For more information, see:

KEY TERMS

Book money: money in book-entry form and therefore not circulating in the form of banknotes and coins.

MAIN DOCUMENT

Consolidated version of the Treaty on the Functioning of the European Union —Part Three — Union policies and internal actions — Title VIII — Economic and monetary policy — Article 119 (ex Article 4 TEC) (OJ C 202, 7.6.2016, pp. 96-97)

Consolidated version of the Treaty on the Functioning of the European Union —Part Three — Union policies and internal actions — Title VIII — Economic and monetary policy — Chapter 5 — Transitional provisions — Article 140 (ex Articles 121(1), 122(2), second sentence, and 123(5) TEC) (OJ C 202, 7.6.2016, pp. 108-110)

last update 14.09.2017

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