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Summaries of EU Legislation

EU economic and monetary union

SUMMARY OF:

Article 3 of the Treaty on European Union

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 ARTICLES?

  • Article 3(4) of the Treaty on European Union (TEU) provides for the European Union (EU) to establish an economic and monetary union whose currency is to be the euro.
  • To this end, Article 119 of the Treaty on the Functioning of the European Union (TFEU) states that the EU and the EU Member States will closely coordinate their economic policies and define and implement a single monetary policy and exchange rate policy. It also provides for the introduction of a single currency, the euro. These activities of the Member States and the EU will entail compliance with the following guiding principles: stable prices, sound public finances and monetary conditions and a sustainable balance of payments.
  • Article 140 TFEU states that Member States must bring their national legislation in line with relevant EU law and fulfil certain economic conditions to become a member of the euro area. These conditions are known as the convergence criteria or Maastricht criteria: price stability, sound and sustainable finances, durability of convergence and exchange-rate stability. The economic convergence criteria are further developed in Protocol 13 to the treaties.

KEY POINTS

EU economic and monetary union

This is the process of aligning economic and monetary policies in the Member States and it comprises three stages.

  • Stage one (1990–1993). Removal of barriers to free movement of capital between Member States, improvement of economic convergence, closer cooperation between national central banks.
  • Stage two (1994–1998). Creation of the European Monetary Institute (the predecessor of the European Central Bank (ECB)), preparations for the introduction of the euro, avoidance of excessive deficits and better convergence of policies (to ensure stable prices and strong public finances).
  • Stage three ( onwards). Irrevocable fixing of exchange rates, gradual adoption of the euro by the Member States as their currency, implementation of a single monetary policy under the responsibility of the ECB, entry into effect of the intra-EU exchange rate mechanism (ERM II) and entry into force of the Stability and Growth Pact.

While the first two stages of EMU have been completed for all Member States, the final stage is still ongoing. To date, 21 Member States have adopted the euro as their official currency (collectively referred to as the euro area).

Transition to the euro

Before it can introduce the euro, a Member State must first meet several economic and legal requirements – the convergence criteria set out in Article 140 TFEU:

  • the purpose of the economic convergence criteria is to ensure that the economic and financial situation of the EU is stable;
  • the legal convergence requires that Member States national legislation, including the statutes of its national central bank, is compatible with the relevant EU law.

When a Member State fulfils all of these requirements, the Council of the European Union decides that it may adopt the euro as its currency. The euro then replaces the national currency and becomes that Member State’s official currency.

Member States in which the currency is the euro are considered to form the euro area, in which a single monetary policy is conducted under the responsibility of the Governing Council of the ECB.

The Member States that have not yet adopted the euro as their currency are Member States with a derogation pursuant to Article 139 TFEU. The European Commission and the ECB report to the Council, at least every two years, or at the request of the Member State with a derogation, on their progress towards fulfilling the convergence criteria. After consulting the European Parliament and after discussion in the European Council, the Council decides on a proposal from the Commission that the Member State concerned fulfils the necessary conditions and may adopt the euro as its currency, and repeals the derogation for the Member State concerned.

European Central Bank

The ECB plays a central role in EMU. Through its decision-making body, the Governing Council, it sets the monetary policy for the euro area. It also has the exclusive right to authorise the issue of euro banknotes within the EU. Member States may issue euro coins, but the ECB must first authorise the annual amount (volume) to be issued.

The first Member States in the euro area

  • On , a historic date as regards the launch of the third stage of EMU, the Council adopted a decision acknowledging that 11 Member States (Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland) fulfilled the necessary conditions to introduce the single currency on .
  • In 2000, a similar decision was taken for Greece, which entered the third stage of EMU in January 2001.
  • The euro was introduced in two steps.
    • . The euro was introduced as book money1 and the conversion rates between the euro and the currencies of the Member States were fixed.
    • . Physical euro coins and banknotes were introduced in the relevant Member States. People and businesses could subsequently make their cash payments in euro.

Expansion of the euro area

  • In principle, all Member States are required to join the third stage of EMU and thus to adopt the euro. However, some have not yet fulfilled the economic and legal requirements, and Denmark has opted out of participating in the third stage of EMU, the details of which are set out in Protocol No 16 to the treaties. Denmark has reserved the option of ending its exemption arrangements and applying to adopt the euro, but has not announced any such intention so far.
  • Member States that have adopted the euro after 2002:

BACKGROUND

For further information, see:

KEY TERMS

  1. Book money. Money which is not in cash form and therefore not circulating in the form of banknotes and coins.

MAIN DOCUMENTS

Consolidated version of the Treaty on European Union – Title I – Common Provisions – Article 3 (ex Article 2 TEU) (OJ C 326, , p. 17).

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, , 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, , pp. 108–110).

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