The basis of the European Monetary Union was to build a united Europe after the World War II. This was initiated by when the European nations created the European Coal and Steel community, with a view to freeing trade in these two sectors. The pricing policies and commercial practices of the member nations of this community were regulated by a supranational agency. In 1957, the Treaty of Rome was signed by Belgium, France, Germany, Italy, Luxemburg and the Netherlands to form the European Economic Community (EEC), whereby they agreed to make Europe a common market. While they agreed to lift restrictions on movements of all factors of production and to harmonize domestic policies, the ultimate aim was economic integration. The EEC achieved the status of a customs union by 1968. In the same year, it adopted a Common Agricultural Policy (CAP), under which uniform prices were set for farm products in the member countries, and levies were imposed on imports from non- member countries to protect the regional industry from lower external prices. In the European unification, power was given to all member countries that they could veto any decision taken by other members. This hindrance was removed when the members approved of the Single European Act, in 1986, making it possible for a lot of proposals to be passed by weighted majority voting. This paved way for the unifications of the markets for capital and labour, which converted EEC practically into a market on January 1, 1993.



The Heads of State and governments of the countries of the EU decided at Maastricht on 9th and 10th December 1991 to put in place the European Monetary Union (EMU). Adhering to the emu meant irrevocable fixed exchange rates between different countries of the Union. The setting up of the emu had been a step forward towards the introduction of a common currency in the member states of EU, as per the Maastricht Treaty. It had been ratified by all 12 countries which constituted the union at that point of time. The emu completed the mechanism that started with the Customs Union of the Treaty of Rome and the big Common Market of the Single Act.


The objectives of the emu are:-


  • Adoption of an economic policy, based on a close coordination between economic policies of the member states.
  • Fixing of irrevocable exchange rates leading to a single currency.
  • Development of a single monetary policy having objective of price stability and the support to the economic policies of the member states in general.


The primary advantage of emu was that it helped in stabilizing exchange rates in the currencies of member states. It also helped in elimination of transaction costs, greater transparency in prices and greater credibility with respect to the world outside. Also, EMU signified giving up a independent national monetary policy. There seemed to be an agreement among the member states that the effect of the EMS would be beneficial for the economic growth of Europe. However it was anticipated there would be some problems in short and medium term. For instance, the programmes of structural adjustment carried out by the countries like Italy, Spain, Germany to reduce public deficits and inflation by a restrictive policy had negative effects on internal demand and growth. This policy also had negative effects on neighboring countries in terms of reduction of their international business. The countries which had not attained a required level of economic convergence found it difficult for maintaining the currency within the EMS.


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