Eurosystem

The road towards EMU

The Barre Plan

The idea of creating a common currency emerged in the 1970s as part of the European integration process. However, it was not covered by the existing treaties of the time and as the international monetary system was functioning well with stable exchange rates there was no demand for a common currency.

Due to tensions in the monetary system, in 1969 the European Commission presented the Barre Plan with the main objective of progressing the single currency project.

In line with this plan, the Heads of State and Governments of the European Economic Community (EEC) invited the Council of Ministers to develop a strategy to create an economic and monetary union.

The Werner Report

The result of the Council of Ministers’ work was called the Werner Report, which was published in 1970 and proposed the creation of an economic and monetary union in various stages starting in 1980.

This project failed to materialise due to the considerable instability present in the international currency markets, the collapse of the international monetary system and the world recession which followed the first oil crisis in 1973.

The European Currency Snake

In 1972, the countries belonging to the European Economic Community (EEC), aware of the problems that fully flexible exchange rates can cause in a common market, created the so-called European Currency Snake to maintain stability between the different European exchange rates.

The results were not encouraging: imbalances between Europe's economies caused several devaluations and revaluations, with countries leaving and joining the exchange rate stability mechanism.

The European Monetary Snake, initially created at a Community level, was reduced to an area of stability based around the Deutsche Mark, comprised of various countries inside and outside of the EEC.

The EMS

To counter unstable and volatile exchange rates, in 1979 members of the EEC created the European Monetary System (EMS) which included the currencies of all Member States, with the exception of the pound sterling.

The EMS was created with three specific elements:

  1. A reference currency, the ecu, whose value was calculated based on the weighted average of EMS currencies.
  2. Stable yet adjustable exchange rates, based on the ecu. The currencies were controlled by an exchange rate mechanism and could fluctuate within a band of ± 2.25% against central exchange rates.
  3. A credit mecanism set up by transferring 20% of the currency and gold reserves of each country to a common fund.

The EMS underwent radical changes as it forced EEC countries to adjust their economic and monetary policies and supported the creation of a zone of growing monetary stability as well as the progressive relaxation of controls on capital.

The adoption of the Single European Act in 1986 represented a new step towards the single currency and EMU, as it established a schedule for the creation of the single market and reaffirmed the need to create an economic and monetary union.

From 1987, exchange rate adjustments became increasingly less frequent and bilateral prices against the Deutsche Mark progressively stabilised.

Furthermore, during this time the number of countries participating in the exchange mechanisms of the EMS increased, with Spain joining in 1989, the United Kingdom in 1990 and Portugal in 1992.

The EMS achieved the following objectives: a high level of exchange rate stability in Europe over an increasingly larger area and, partly due to this, a certain degree of nominal convergence accompanied by gradual but unstoppable progress towards the free circulation of capital.

The Delors Report

In 1988, the European Council invited a committee of monetary policy experts, made up of the governors of the central banks of EC countries, to propose the measures needed to establish EMU.

The result was the so-called Delors Report, which was approved at the Madrid summit in June 1989, and which recommended a three-stage plan to achieve this objective. The legal framework of the EMU was yet to be established.

On 7 February 1992, after signing the Treaty on European Union (TEU) in Maastricht, the European Union (EU) was founded. A new chapter was added to the founding treaties of the European Communities dedicated to economic and monetary policy which laid the foundations for EMU and stipulated the procedure and schedule for its creation.

During 1992 and 1993, political uncertainty concerning the project resulted in a major crisis within the EMS. Various readjustments had to be made to central prices and in September 1992 Italy and the United Kingdom temporarily dropped out of the system. In August 1993, the fluctuation band was extended from the previous ± 2.25% to ± 15%, due to large speculative movements against European currencies.

This measure helped the EMS to function in a satisfactory way again and encouraged four new countries to join the exchange rate mechanism: Italy, Austria, Finland and Greece.

The beginnings of the EMU

The design of the EMU by the TEU combined a series of obligatory macroeconomic convergence requirements for Member States with specific deadlines set in advance. This allowed the groundwork to be laid without putting any commitment at risk.

In light of this situation, the year 1999 was set as the deadline to initiate the EMU. Those countries meeting the convergence criteria on this date would be able to join.

The extraordinary European Council held in Brussels on 2 and 3 May 1998, in accordance with the recommendations of the European Commission based on the convergence reports drafted by the European Monetary Institute (EMI) and the Commission itself, set the start of the third stage of EMU for 1 January 1999, in which 11 countries would participate: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland.