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EU economic and monetary union – third stage

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EU economic and monetary union – third stage

 

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 THE THIRD STAGE OF THE EU’S ECONOMIC AND MONETARY UNION?

The third stage of the EU’s economic and monetary union (EMU) is the introduction of the euro and the implementation of a common monetary policy in the EU countries.

KEY POINTS

The EMU is a process which aims to harmonise the economic and monetary policies of the EU countries. This process comprises the following 3 phases:

  • Phase No 1 (from 1 July 1990 to 31 December 1993): the free movement of capital between EU countries;
  • Phase No 2 (from 1 January 1994 to 31 December 1998): coordinating EU countries’ monetary policies increasing cooperation between their national central banks and strengthening economic convergence between the EU countries;
  • Phase No 3 (from 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).

The first 2 stages of EMU have been completed. The third and final stage is still under way. It specifically concerns the introduction of the euro in the EU countries. At present, 19 EU countries have adopted the euro as a single currency. These countries form the ‘euro area’.

Transition to the euro

Before being able to join the third phase of the EMU, an EU country must first meet a number of economic and legal requirements.

The economic requirements are called the convergence criteria. The objective is to ensure that the EU has a stable economy and financial situation in order to preserve the stability of the euro area.

According to the legal requirements, the national law 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 the requirements, it is authorised to participate in the third phase of the EMU and to adopt the euro as a single currency. The euro then replaces the former national currency and becomes the official currency of the country.

European Central Bank

The European Central Bank plays an essential role in EMU. It is the ECB that draws up 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.

The first countries in the euro area

3 May 1998 is an historic date with regard to the launch of the third phase of economic and monetary union. On this date, the Council adopted a decision acknowledging that 11 EU countries had fulfilled the necessary conditions to adopt the single currency on 1 January 1999 (Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland).

The euro was then introduced in 2 stages:

  • 1 January 1999: the euro was introduced as ‘book’ money and the conversion rates are fixed with the former national currencies which thus become non-decimal sub-divided 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 fiduciary payments in euros.

Greece, which did not fulfil the convergence criteria in 1998, requested a re-evaluation of its situation in 2000. The European Commission then delivered a favourable opinion and Greece officially entered the third phase of EMU on 1 January 2001.

Enlargements of the euro area

In principle, all EU countries are supposed to join the third phase of the EMU and hence adopt the euro (Article 119 of the Treaty on the Functioning of the EU). However, certain countries have not yet fulfilled the necessary economic and financial conditions. These countries receive provisional derogations until they are able to join the euro area. Furthermore, Denmark and the United Kingdom have an exemption, also known as an opt-out, from participating in the euro (see below).

At least every 2 years, the Commission and the ECB assess the progress made by those countries with derogations from the convergence and legal requirements. If they deliver a favourable opinion on the country’s ability to join the third phase of the EMU, the Council then adopts a decision on the country’s membership of the euro.

On the basis of this procedure, the euro area has been enlarged several times to include additional countries:

Currently, 19 of the 28 EU countries use the euro as their common currency.

Exemptions

The United Kingdom and Denmark notified their intention not to join the third phase of the EMU and hence not to adopt the euro. These 2 countries therefore have an exemption from participating in the EMU, the arrangements of which are detailed in the protocols Nos 1 and 16, annexed to the EU’s founding treaties. Furthermore, Denmark and the United Kingdom reserve the option to end their exemption arrangements and apply to join the third phase of the EMU.

BACKGROUND

For more information, see:

MAIN DOCUMENT

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

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

last update 01.08.2016

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