History behind European Monetary Union

The euro seems a novelty - but it is not. It was preceded by a series of monetary unions in Europe and beyond.

First are countries like the USA and the USSR (or in their case) monetary unions. A single currency has been or is being used on huge land masses incorporating previously distinct political entities, social and economic. The U.S. Constitution to provide for example, not for the existence of a central bank. Founding Fathers such asMadison and Jefferson, the objections to its existence. A central monetary institution was founded in 1791 (following the example of the Bank of England). But Madison (as president) had its license expires in 1811. It 'was taken in 1816 - only to die again. It caused a civil war for a monetary union in the future. banking regulation and supervision have been initiated only in 1863 and drew a distinction between national and state banks.

Until then, private banks in 1562 and the pressureknown exposure, some of them not legal tender. In 1800 there were 25 The same has happened in the principalities, which are then in Germany: 25 private banks were only 1847-1857, with the explicit intention to set up printing of banknotes in circulation are legal tender. In 1816-1870 a series of currency (mostly foreign), in Rhineland used alone.

A wave of banking crises in 1908 to form the Federal Reserve System, and led52 years would pass until the full monopoly of money issuance was maintained.

What is a monetary union? E 'enough to have a single currency with free and guaranteed convertibility?

Two other conditions are met: the exchange rate will be effective (realistic and therefore not susceptible to speculative attacks) and that the union members to keep monetary policy.

In fact, history shows that the condition of a single currency, but it is preferableis not a conditio sine qua non. A union may take "several currencies, fully and permanently convertible into one another at irrevocably fixed exchange rates", which is really like a single currency with various denominations, each printed by another member. What seems most important is the relationship (as expressed by the exchange rate) between the EU and other economic actors. The currency of the Union must be convertible to other currencies at a certain (it mayfluctuating - but always one) exchange rate through a policy of exchange rate is determined. This must cover the entire territory of the single currency - otherwise, arbitrageurs will buy in one place and selling them could be introduced in another control and exchange, is eliminating free convertibility and inducing panic.

This is not theoretical - and unnecessary - debate. ALL monetary unions failed in the past because they can use their currency or currencies to be exchanged(Compared to external currencies), in varying amounts, depending on where it was rebuilt (in this part of the monetary union).

"Before long, all Europe, except England, you will have the money." This was written by William Bagehot, editor of The Economist, the prestigious British scientific journal. But it was written 120 years ago when Britain, even then was debating whether to introduce a single European currency.

Joining a monetary union means sacrificing independent monetary policy and therefore asignificant piece of national sovereignty. The member can no longer control its money supply, inflation or interest rates or its exchange rate. Monetary policy is transmitted to a central monetary authority (European Central Bank). A common currency is a transmission mechanism of economic signals (information) and expectations, frequently through monetary policy. In a monetary union, fiscal profligacy of some members, for example, often need to raise interestPrices to prevent inflationary pressures. This need arises because these countries share a common currency. In other words, the effects of budget decisions of a member shall be communicated to other members (through monetary policy), because they share a currency. Money is the medium of exchange of information on current health and future of the economies involved.

monetary unions that have not followed this course are no longer with us.

Currency Trade unions, as mentioned, are not new. One felt the need for a uniform medium of exchange since the time of ancient Greece and medieval to create. However, these early monetary unions would not have brought the hallmarks of modern trade unions: they had no central monetary authority or monetary policy, for example.

The first truly modern example would be the monetary union of colonial New England.

The colonies of New England (Connecticut, Massachusetts Bay, New Hampshire and> Rhode Island accepted) another paper as legal tender until 1750. These notes are even accepted as tax payments by the governments of the colonies. Massachusetts was the dominant economy and sustained this arrangement for almost a century. It was envy that this agreement a great success: the other colonies began to print their notes outside the Union. Massachusetts has bought back (redeemed) all its paper money in 1751 to pay for it in silver. E 'built a mono-metallic (silver) standard and not to accept the paper money of the other three colonies.

The second, more important, the experiment was the Latin Monetary Union. It 'was a pure French system, to further cement and expand their political capacity and effectiveness of monetary policy. Belgium adopted the French franc, when it gained independence in 1830. It was natural that France and Belgium (together with Switzerland) should encourage others to participate in 1848. Italyfollowed in 1861 and the last to Greece and Bulgaria (!) in 1867. Together they formed the bimetallic monetary union as the Latin Monetary Union (LMU) is known.

The LMU flirted seriously with Austria and Spain. The Foundation Treaty was officially signed up to 12/23/1865, in Paris.

The rules of this Union were a bit 'special, and in some ways seemed to defy conventional economic wisdom.

Unofficially, the French influence extended to 18 countries that have adopted 'gold franc as the monetary base. Four of them have a gold, silver, and the conversion rate of minted gold coins as legal tender in all of them. He accepted voluntarily limiting the amount of money that the print on more than 6 franc coins per capita forbade (the four were: France, Belgium, Italy and Switzerland).

Officially (and really) a gold standard developed in Europe and contain currency issuers, such as Germany and the UK). But in the Latin Monetary FundUnion, the quantities of gold and silver Union member countries could mint was unlimited. marked regardless of the amount of coins were legal tender throughout the Union. Smaller cut (token) silver coins, minted in limited quantities only legal tender in the issuing country.

There was no single currency like the euro. The countries held their national currency (coins), but these were at par with each other. An exchange fee of 1.25% was assigned. Convert tokens had a silver content lower than that of the coins of the Union.

State and municipal offices are required to accept up to 100 francs coins (even if they are not convertible and had a lower intrinsic value) in a single transaction. This shortcoming has led to arbitrage mass production: conversion to low metal content of coins to buy a high metal content.

The Union had a policy of money supply-based or administration. E 'was to let the market determine how much money isCirculation. The central bank is committed to the free exchange of gold and silver. But this promise means that the central banks of participating countries have been forced into a fixed exchange ratio between the two metals (15 to 1 at the time) ignoring the prices on world markets every day to keep firm.

The LMU was too small to influence world prices for these two metals. The result was the silver, and overestimated the export of silver from one member to another with brilliantmore detours to circumvent the laws of the Union. There was no choice but to suspend silver convertibility and thus acknowledge a de facto gold standard. Silver coins and tokens remained legal tender.

This was a big problem for the Union and the coup de grace unprecedented funding requested by the First World War gave. The LMU was officially dismantled in 1926 - but died long before. The lesson: a common currency is not enough - a commonThe monetary policy monitored and enforced by a common central bank is required to support a monetary union.

Like the LMU was formed in 1867, a meeting of the International Monetary Fund. Twenty countries participated and discussed the introduction of a global currency. They decided to take the gold (British, USA), standard and to allow a transitional period. They decided to use three major "hard" currencies, but to equate their gold content so as to make them fullyinterchangeable. Nothing came out - but this plan was much more intelligent than LMU.

A false path seemed to have been Scandinavian Monetary Union.

Sweden (1873), Denmark (1873) and Norway (1875) formed the Scandinavian Monetary Union (SMU). The model has been known to accept each other gold coins as legal tender in their territories. Token coins were also recognized by the cross-border legal tender as were banknotes (1900) by the banks of member countries. E 'worked so perfectly that no one wanted to convert currencies and exchange rates were not available 1905-1924, when Sweden dismantled the Union after the independence of Norway. In fact, he created the participating countries (though not officially), equivalent to a single central bank reserves, unified - expand lines of credit money to each of the member countries.

Scandinavian crowns and maintained until the supply of gold has been limited. World War changed this situationgovernments dumped gold and inflated their currencies by engaging in competitive devaluations. The central bank devalued the currency used to buy gold official (cheap) rates. Sweden has seen through this trick and refused to sell their gold in the officially fixed price. The other members began to sell large quantities of chips with Sweden and the proceeds to buy the strongest Swedish economy "(= exchange) (broken down as the price of gold), in a more favorable price. Swedenprohibiting the import of other members of the token. Without a fixed price of gold and free convertibility of the currency, there was discussion of the Union.

The last great (and last) attempt at monetary union in East African Currency Area. An equivalent experiment continues in the Francophile part of Africa to the CFA currency.

Parts of East Africa ruled by the British (Kenya, Uganda and Tanganyika, and in 1936, Zanzibar) adopted in 1922 a common currency,East African shilling. Independence in East Africa had no monetary aspect because it remained part of the area of Sterling. This is the conversion of local currency guarantees in pounds sterling. In relation to this a matter of national pride (and strategic) of the United Kingdom too much money poured into these emerging economies. This monetary union has been hampered by the introduction (1966) of local currencies in Kenya, Uganda and Tanzania. The three coins were legalOffer each of these countries and were all convertible lbs.

It 'was the pound, how was devalued by strong in the late 60s and early 70s. explicitly and free convertibility - - The Sterling Area was founded in 1972 and with it the strict monetary discipline which have dismantled imposed on its members. A divergence in the value of coins (due to different objectives and inflation rates are derived) was inevitable. In 1977, the East African Currency Areafinished.

Not all monetary unions made the same sad end, but. Probably the most famous of the most successful of the Zollverein (German Customs Union).

At the beginning of the 19th Century, there were 39 independent political entity, of which the German Confederation as it is currently in Germany. All major currencies (gold, silver) and had its own standards for weights and measures. The mobility of the workforce in Europe, the decisions of the Congress of Vienna more1815, but trade was ineffective because the number of different currencies.

The small German states formed a customs union as early as 1818th This was followed by the formation of three regional groups (North, Central and South), which were combined in 1833. In 1828, Prussia harmonized and unified tariffs with the other members of the Federation. Liabilities associated with tariff can be paid in gold or silver. different currencies have been developed and are connected byfixed exchange rates. It 'was an over-riding single currency: the Vereinsmunze. The Zollverein (Customs Union) was founded in 1834 to facilitate trade and reduce costs. Most of the political units agreed to choose later between the two monetary standards (the Thaler and the Gulden) in 1838 and nine years, was the Central Bank of Prussia (with 70% of the mass of the population and territory of Germany Future), the central bank effective federal. The North GermanThaler was fixed at 1.75 to the South German Gulden and in 1856 (when Austria joined the EU) was, (his was a short-lived affair, because Prussia and Austria declared war on the ' each other in 1866) to 1.5 guilders Austrians.

Germany was united by Bismarck in 1871 and the Reichsbank was founded four years later. There was the Reichsmark, which was the only legal tender and the entire German Reich. The currency Union survived two world wars, a devastating battle with inflation1923 and the collapse of the currency after the Second World War. The Reichsmark became the solid and trustworthy Bundesbank. The Union is still in the D-Mark.

This is the only case of a monetary union which, while not being able preceded by a political agreement. E 'survived because Prussia was great and it was quite true power and influence to force respect for the other members of the Federation. Prussia would have introduced a stable currency and thereforeMetal standard. The other states could not take their currencies of their intrinsic value. For the first time in the history of money has been a professional business decision, totally depoliticized.

In this context, we must mention another success (ongoing) Union - the CFA franc zone.

The CFA (French African Community) is a coin) used in the former French colonies of West and Central Africa (and, oddly, in a former Spanish colony. Area currencysince it was for three decades and has different ethnic groups, linguistic, cultural, political and economic. The currency withstood devaluations (the last of 100% vis a vis the French Franc), changes of regimes (from colonial to independent), the existence of two groups of shareholders, each with its own central bank, trade controls and capital flows - not to mention a number of natural and manmade disasters. What makes it so successful is perhaps the fact that reservesMember States are in the vaults of the Central Bank and the French, that money is almost fully convertible bonds, accumulated the French franc. Convertibility is guaranteed by the French Treasury itself.

France imposes monetary discipline (that sometimes lacks at home!) Directly and through the generous financial support.

Europe has more than its share of the bankrupt (the snake, the EMS, the ERM) and successful (ECU, the United Kingdom and Ireland) CurrencyUnifications.

A single overlooked between Belgium and Luxembourg (Benelux, the political direction that the Netherlands is included).

There is no real monetary union. Both have their own currencies. But their currencies are translated at parity and serve as legal tender in both countries since 1921. The Belgian Central Bank controls monetary policy in both countries with the exception of the rules, sharing a common body for monitoring. In both 1982 and 1993, the twocountries considered dismantling the Union - but that was not to talk seriously with so many benefits (especially for small parts).

These three currency unions are all survivors who are responsible for a monetary authority, at least in fact due to the management of money, especially on.

What can we learn from all these (significant) cumulative experience?

for (A) A dominant land must be successful for a union. Must have a strong geopoliticalDrive and maintain political solidarity with some of the other members. It must be large, influential, and its economy must be interlocked with the economies of others.

(B) Central institutions must be set to monitor and enforce fiscal and other measures to coordinate the activities of Member States to implement the policy choices and techniques for the monetary aggregates and seigniorage (= money printing) of control, legal provision of competition and the rules for issuingMoney.

(C) E 'better if a monetary union is preceded by a politician. However, it may be difficult (consider the examples from the United States and Germany).

(D) wage and price flexibility are sine qua non. Their absence is a threat to the survival of a union. Fiscal policy (transfers from rich areas to poor) are a partial solution. You can reduce and alleviate the problems - but not solved. Transfers also call for a clear and consistent fiscal policies in the field ofTaxes and spending. Problems like unemployment plague a rigid, sedimented Union. The works of Mundell and McKinnon (optimal currency areas) prove it decisively (and separately).

(E) The last condition is clear convergence criteria and monetary convergence targets.

Measured against these requirements is the current European Monetary Union adequately assimilate the lessons of his predecessors created evil. It 'set in a more rigid in their work in Europe and pricesPractices of 150 years, there was heavy political merger before it relies too heavily on transfers without a place to be a coherent monetary or a consistent fiscal policy.

This monetary union is therefore likely to join his ancestors and remain a footnote in the annals of economic history.