From Common Market to EMU: An Historical Perspective on European Economic and Monetary Integration

Abstract

This paper traces the history and the institutional background to the establishment of the Economic and Monetary Union in the EU. It argues that since the establishment of the European Economic Community (EEC) in the late 1950s, attempts at monetary integration and ultimately monetary union, have tended to assume importance only as a result of financial crisis and becoming a vague objective as soon as the crisis recedes. In recent years, however, this search has assumed greater urgency for a number of reasons explored in the paper. Economic Union, on the other hand, has followed a smoother transition. Economic integration was used after the Second World War to raise political goals, chiefly to anchor West Germany within Western European alliance. Since that time the economies of member states have slowly integrated. The economic environmment which existed in the 1950s is a far cry from the integrated European Community of today. In the 1950s, European currencies were not convertible and domestic trade was highly protected. Intra-European trade was based on bilateral clearing arrangements institutionalised by the European Payments Union. Today EU currencies are fully convertible. Capital controls, intra-EU tariffs and quotas have been eliminated, and the single market has been completed. The path which monetary union followed has gone through a number of stages. The Werner Plan of the early 1970s which set the goal of economic and monetary union by the end of the decade was only partially implemented. Its failure can be put down to unfavourable international economic conditions and poor institutional structures. In the early 1980s, a new monetary initiative was launched, the European Monetary System (EMS) which was condemned to failure by many. However, it struggled on through its initial phase until it was replaced by the current EURO arrangements. Each process should be interpreted as a building block of monetary union which ultimately culminated in the Maastricht Treaty that laid out a precise path and timetable for economic and monetary union.