Economic and Monetary Union (EMU)
Definition
The euro area is an area whose Member States share a single market, a single currency and a single monetary policy.
The main implications of the creation of this monetary area are:
- For national economic policies:
- loss of the exchange rate as an adjustment mechanism to combat any deterioration in competitiveness;
- impossibility of changing domestic interest rates.
- For the various markets:
- reduction of transaction costs,
- abatement of uncertainty as to monetary, exchange and financial conditions;
- tendency towards integration of both financial and goods markets.
To assess the euro area's importance in the global economy, it is instructive to compare the US economy with the euro area comprising Germany, France, Greece (which joined on 1 January 2001), Italy, Spain, Portugal, Ireland, Belgium, the Netherlands, Luxembourg, Austria and Finland. The figures were (as at the beginning of 2001):
- the euro area had a population of 303 million compared with 276 million in the US;
- the euro area accounted for around 16% of world GDP, somewhat less than the US (22%);
- the euro area's share of world exports was higher than that of the US (16% against 13%);
- the public sector is significantly larger in the euro area (public expenditure as a proportion of GDP was 20%, against 18% in the US);
- the euro area's financial system is based predominantly on banking products and securities-based financing plays a minor role, whereas in the US most financing and saving is routed through the equity and debt markets. The figures are:
- bank deposits (80% of GDP) and bank lending (132% of GDP) are much more significant in the euro area than in the US (55% and 80% of GDP, respectively);
- credit to general government (24% of total credit) in the euro area exceeds that in the US (14%);
- outstanding domestic fixed-income securities at end-1999 amounted to 166% of national GDP in the US economy, against 86% in the euro area;
- stock market capitalisation in the US (nearly €13,000 bn at end-1999) tripled that of the euro area.
Finally, the benefits of the euro area tend to be concentrated towards the end of the EMU process and the costs at the start. Nonetheless, mention should be made of the following:
- price stability, which benefits more those agents less able to protect themselves from inflation and those receiving income from financial assets not sufficiently hedged against general price level rises;
- the rise in intra-Community trade, which directly benefits the companies serving to generate such trade, but which rapidly spreads to the economy as a whole;
- the elimination of transaction costs and of the cost of hedging exchange risk between Community currencies, which benefits financial service users who are, ultimately, more or less all the agents in the economy.