Implications of Economic and Monetary Union to the Global Economy

Abstract

On January first, 1999, stage III of Emu began. Monetary and fiscal policies in Euroland will be conducted with an eye towards winning the world's confidence in the euro. The Maastricht criteria on debts and deficits have already led to unprecedented spending-cuts and social security reforms in many Member States. The Stability and Growth Pact is expected to Keep the pressure for fiscal prudence. The Maastricht treaty ensures the independence of the ECB, even though other institutions (such as the Euro-11) may also try to influence monetary policymaking in Euroland. Monetary and fiscal tightening, as well as loss of devaluation as a policy tool, should encourage progress in much needed stroctural reforms.
For any currency to be widely used and held as a vehicle of financial investment, its market must be deep, liquid and transparent. Here the US dollar has an advantage over the euro. In October the Commission adopted an action plan to create a single market in financial services, although implementation may be deiayed due to objections from France among others. In November, seventeen European nations including the UK, Germany and France ageed to start a unified securities market by 2001.
The euro is a new element in a potentially volatile market. The chance of currency market turmoil exists both when the euro is strong and when it is weak. If the markets prefer the euro over the US dollar (due to US current account deficits, for instance) there may be a sudden, massive shift out of the dollar into the euro. If on the other hand, for any reason the confidence in Emu is shaken, the reverse can happen.
Neither of these is a prospect to look forward to. That is another reason why doubts have crept into the minds of many as to the virtues of a completely free movement of capital.
The importance of the EU is now greater than it ever has been in the post-war era. If the euro is widely accepted, developing nations will no longer have to keep all eggs in the same basket, both in terms of foreign exchange reserves as well as baskets to peg their currencies to. In terms of macro-economic balances, the EU needs to help fill the gaping hole in global demand created by financial collapses around the world. And in terms of economic systems, Europe with a strong financial sector and prosperous economy can be effective as a counter-weight, against global convergence towards a system that is market-oriented in the extreme.